BlackRock's Stattman Joins Miller Betting on Large Stocks as Growth Slows
Dennis Stattman, who manages $65 billion in global equities and bonds for BlackRock Inc., is betting the biggest stocks will outperform smaller rivals and Treasuries as consumers pare spending.
Companies such as Johnson & Johnson and Microsoft Corp. have global franchises and strong cash flow and pay dividends that can exceed the yield on 10-year U.S. Treasury notes, said Stattman, whose BlackRock Global Allocation Fund returned 7.1 percent a year over the past decade, fourth-ranked among peers by Morningstar Inc.
“We can’t find a stock among the 20 or 30 biggest U.S. companies that looks expensive,” Stattman, 59, said in a telephone interview from Princeton, New Jersey.
Stattman is among a growing list of investors, including Jeremy Grantham of Grantham, Mayo, Van Otterloo & Co. and Bill Miller of Legg Mason Inc., who are betting on the largest U.S. stocks, sometimes called blue chips. The shares have trailed mid-cap and smaller stocks for the past decade and again in 2010, according to data compiled by Bloomberg. Stattman said the investment in blue chips should pay off over the next two or three years.
“It’s been painful,” said Michael Mullaney, portfolio manager at Boston-based Fiduciary Trust Co., who also favors the largest stocks. Mullaney oversees $9 billion.
The BlackRock allocation fund has the freedom to stray from its benchmark, a blend of 60 percent stocks and 40 percent bonds with 60 percent of the assets invested in U.S. securities and 40 percent in international holdings.
Stattman has worked on the fund since 1989, when it was started as the Merrill Lynch Global Allocation Fund. New York- based-BlackRock, the world’s largest asset manager, bought Merrill Lynch & Co.’s money management unit in 2006.
Of 53 world allocation funds tracked by Chicago-based Morningstar, only three outperformed Stattman’s fund in the 10 years ended July 31. The fund attracted $5.2 billion from investors in the first half 2010, sixth-best among U.S. mutual funds.
“The manager has done a good job handling the major shocks of the last decade,” said Ron Sugameli, who runs the $132 million New Century Alternative Strategies Fund, which owns a stake in Blackrock Global Allocation.
The fund lost 21 percent in 2008, compared to a decline of 37 percent for the Standard & Poor’s 500, as it built up cash and avoided most financial stocks, filings with the Securities and Exchange Commission show.
BlackRock Global Allocation gained 22 percent in 2009, less than the S&P 500’s gain of 26 percent, Bloomberg data show.
Blue chips have become cheap after a decade in which their earnings grew while their stock prices did not, said Stattman.
Profit at Redmond, Washington-based Microsoft roughly doubled in the 10 years ended June 30. The shares fell 42 percent over the same period and now trade at a price-to- earnings ratio of 11.3, compared with the 13.9 average for the S&P 500.
Microsoft was Stattman’s third-largest equity holding at the end of the second quarter, according to BlackRock’s website.
Johnson & Johnson, another of the fund’s top 10 stock holdings, has a dividend yield of 3.7 percent. The quarterly dividend at the New Brunswick, New Jersey-based company rose to 54 cents a share from 33 cents over the past five years, Bloomberg data show.
“I can put that in my pocket,” said Stattman.
Jim Tisch, the chief executive officer of Loews Corp., said in an interview this week that he’s investing in “large cap, good dividend-paying stocks” such as Johnson & Johnson because their yield beats what he can earn in Treasuries.
“There are equities that are rather intriguing, especially when compared to fixed income,” Tisch said. “Who would have thought five or 10 years ago that a 3 percent yield on a stock would be a good yield. But actually today it’s a very good yield.”
Because they are global companies, the biggest U.S. firms benefit from faster-growing markets in Asia, said Stattman. Armonk, New York-based IBM, the fund’s sixth-largest stock holding, gets 58 percent of its sales outside the Americas, according to data compiled by Bloomberg.
“Good management teams at these companies will put the earnings to work and increase the value of the businesses over time,” Stattman said of his blue-chip holdings.
In a July 21 newsletter, Miller at Baltimore-based Legg Mason said investors have a “once-in-a-lifetime opportunity” to buy U.S. stocks with large market capitalizations at the cheapest prices in almost six decades. Known for beating the S&P 500 a record 15 straight years through 2005, the portfolio manager trailed the index for the next three years.
Jeremy Grantham, the chief investment strategist of Boston- based Grantham, Mayo, Van Otterloo, in a July 19 newsletter recommended “quality” U.S. stocks, those with high stable returns on capital and low debt. Such stocks, GMO wrote on its website, should return more than three times as much as large U.S. stocks in general over the next seven years.
The $14 billion GMO Quality Fund holds both Microsoft and Johnson & Johnson among its top positions, Bloomberg data show.
“I have to go back a long way, to at least 1993, to see so many good businesses selling at below-average prices,” Donald Yacktman, whose $1.3 billion Yacktman Focused Fund returned 12 percent annually for the past decade, said in a July 29 interview with Bloomberg Television. Microsoft was “dirt cheap,” he said.
Not All Bargains
Scott Black, president of Boston-based Delphi Management Inc., said not all blue chips are bargains. Black, who manages $900 million, owns Microsoft and not Johnson & Johnson, because the health-care company’s “stagnant” sales suggest the firm will struggle to lift earnings in the years to come.
“There is only so much cost-cutting you can do,” he said in a telephone interview.
Microsoft’s sales rose 22 percent in the three months through June compared with a year earlier, according to data compiled by Bloomberg. Johnson & Johnson’s sales gained less than 1 percent.
The largest stocks, as represented by the Standard & Poor’s 100 Index, lost 6.3 percent this year through Aug. 26. The S&P’s Midcap 400 Index fell 0.2 percent. The Russell 2000 Index, a proxy for small stocks, fell 3.4 percent, Bloomberg data show. In the 10 years ended July 31, the largest stocks lost 2.4 percent per year while mid-cap stocks gained 5.8 percent and small stocks rose 4.1 percent annually.
Blue chips may have trailed because there is a perception that they are boring, said Chuck Joyce, who manages GMO’s quality portfolios. Henry Smith, chief investment officer at Haverford Trust in Radnor, Pennsylvania, said in a telephone interview that the “steady-Eddie” quality of the big stocks has caused them to be ignored in a market that favors momentum.
Smith, who oversees $6.2 billion, said in a slow-growing economy the biggest companies will stand out because their earnings are more predictable. Stattman agreed, saying blue chip stocks can outperform even if the U.S. economy grows between 1 and 2 percent per year.
“I am not an economist,” he said, “but if you ask me what is more likely -- growth of 1.5 percent or 3 percent -- I’d pick 1.5 percent.”
The U.S. economy will expand 3 percent this year and 2.8 percent in 2011, according to a Bloomberg survey of economists.
Stattman is avoiding many consumer stocks because he expects it will take years for American consumers to whittle down their debts. The budget deficits run by the U.S. government mean less money will be available to help the economy grow, Stattman said.
The U.S. Congressional Budget Office this month predicted the budget deficit for fiscal year 2011 will be $1.07 trillion, about 7 percent of the nation’s gross domestic product.
Treasuries offer low yields and could lose value if rising inflation pushes interest rates higher over the next few years, Stattman said. The fund has 10 percent of its money in U.S. Treasuries, compared with 24 percent for its benchmark, he wrote in an Aug. 20 e-mail.
“I would rather own good companies with managements that go to work every day than a piece of paper from the government of which there will be more next week and the week after,” said Stattman. “Ten years from now we may look back and say, ‘Man, what were people thinking buying long-term bonds at those yields.’ ”
‘Piece of Paper’
The 10-year U.S. Treasury note yields 2.48 percent, a 19- month low.
Ten years ago the fund held no gold, he said. Today 4.5 percent of the assets are in gold, a combination of exchange- traded funds and mining stocks.
Stattman called gold an “insurance policy” against central banks that are more interested in boosting growth than in maintaining the purchasing power of their currencies. Gold will also benefit from stepped-up buying in Asia and the Middle East, he said.
Gold climbed 13 percent this year through Aug. 26, Bloomberg data show.
Stattman earned a bachelor’s degree from the University of Virginia in Charlottesville and a master’s of business administration from the University of Chicago. He also worked at the World Bank where he supervised U.S. stocks for the bank’s retirement plan.
To contact the reporter on this story: Charles Stein in Boston at firstname.lastname@example.org