Skip to main content

The Globe and Mail

3 winning investment strategies fund managers use

Just as some European countries combine capitalism and socialism – called the third way – investors would do well to find a new strategy that combines long-term and short-term trading strategies.

This year has been marked by big stock-market moves – in both directions, sometimes on a daily basis. Last week alone, the Dow Jones industrial average moved almost 200 points each day in both directions. Watching the ups and downs has been an emotional roller-coaster ride for investors. Unfortunately, the craziness isn't going to end any time soon, with the European credit crisis far from being over, a sputtering U.S. economy, and emerging markets that are slowing.

It's a challenging time to invest when company fundamentals are ignored. If the standard buy-and-hold strategy isn't working, and the shorter-term risk-on/risk-off far too risky, what type of strategy would?

Story continues below advertisement

The answer is one that addresses long-term needs by managing short-term unpredictability. Like most rewarding things in life, it's not an easy strategy. It involves actively managing your portfolio and keeping on a steady course even when there's bad news all around.

Most, not all, money managers TheStreet spoke with are cautiously optimistic about 2012. Even though the U.S. economy is grinding along, it isn't getting worse. Still, professional investors are being selective on bets in the market.

The UBS Investment Research team says "the greatest opportunities are between groups of stocks that have been mispriced by recent gyrations. Companies with high foreign sales and more volatile names appear undervalued."

Among attractive companies are those at historically low values hurt by events such as worries over Europe but with consistent avenues of growth. Cisco Systems is a good example, trading at only 11 times its earnings estimates. Shares of the company, which reports quarterly earnings this week, are down 10 per cent this year, even as revenue has risen for the past four quarters.

Along the same line, money managers prefer to invest in stocks with what is known as an accidental yield. That occurs when the stock price declines enough to produce a higher-than-normal dividend yield (annual dividend divided by the stock price). A decent dividend yield is considered to be 3 per cent to 5 per cent, a much better return than what you get investing in U.S. Treasuries. Household-cleaning-products company Clorox , which has a stable business model, currently has about a 3.5 per cent dividend yield.

Over the past three years, dividend-paying stocks have outperformed the S&P 500 by 15 percentage points.

For most of this year, defensive stocks have led the market. But over the past month, cyclical names took charge. UBS expects the outperformance by this group to continue, saying: "The energy and material sectors are most sensitive to shifts in the economy and markets. Additionally, we continue to see opportunities in tech, industrials and financials."

Story continues below advertisement

So far this earnings season, the materials sector has reported the largest revenue surprise. On top of that, it's also the cheapest sector. Industrials have also reported solid third-quarter earnings, with strong sales to agriculture, mining and car companies. Additionally, many companies, such as Ford and DuPont , are reporting accelerating growth in U.S. sales as international sales slow. Those cyclical sectors will be among the first to emerge from a global recession, representing a great investment opportunity.

All told, corporate fundamentals are starting to show signs of improvement, with around 70 per cent of the S&P 500 beating third-quarter earnings estimates. Employing some of the strategies listed above may mean better-than-average returns when the world economy rebounds. Nevertheless, stock investing is still far better than leaving your cash in a savings account.

Report an error
Tickers mentioned in this story
Unchecking box will stop auto data updates
Comments

Welcome to The Globe and Mail’s comment community. This is a space where subscribers can engage with each other and Globe staff. Non-subscribers can read and sort comments but will not be able to engage with them in any way. Click here to subscribe.

If you would like to write a letter to the editor, please forward it to letters@globeandmail.com. Readers can also interact with The Globe on Facebook and Twitter .

Welcome to The Globe and Mail’s comment community. This is a space where subscribers can engage with each other and Globe staff. Non-subscribers can read and sort comments but will not be able to engage with them in any way. Click here to subscribe.

If you would like to write a letter to the editor, please forward it to letters@globeandmail.com. Readers can also interact with The Globe on Facebook and Twitter .

Welcome to The Globe and Mail’s comment community. This is a space where subscribers can engage with each other and Globe staff.

We aim to create a safe and valuable space for discussion and debate. That means:

  • Treat others as you wish to be treated
  • Criticize ideas, not people
  • Stay on topic
  • Avoid the use of toxic and offensive language
  • Flag bad behaviour

Comments that violate our community guidelines will be removed.

If your comment doesn't appear immediately it has been sent to a member of our moderation team for review

Read our community guidelines here

Discussion loading…

Due to technical reasons, we have temporarily removed commenting from our articles. We hope to have this fixed soon. Thank you for your patience. If you are looking to give feedback on our new site, please send it along to feedback@globeandmail.com. If you want to write a letter to the editor, please forward to letters@globeandmail.com.