A Portfolio to Defy Deflation

Transamerica Investment Management's Jeff Van Harte explains why First Data and Wal-Mart suit his dour expectations for the market

Investors can expect slower economic growth, lower inflation -- or, in some cases, deflation -- and lower stock-market returns than in the '90s. That's the forecast of Jeff Van Harte, senior vice-president and head of equity investments for Transamerica Investment Management, who is also primary manager of Transamerica's Premier Equity Fund.

Van Harte likes stocks that he thinks will do well in a deflationary world. He cites First Data (FDC ), whose credit- and debit-card processing continues to grow, and Wal-Mart (WMT ), which uses its purchasing power to pass lower costs along to consumers. He says that one of the latest additions to his portfolio is Expedia (EXPE ), which he thinks has both the best business model and management to lead in online travel.

These were some of the points Van Harte made in an investing chat presented Dec. 5 by BusinessWeek Online on America Online, in response to questions from the audience and BW Online's Jack Dierdorff and Karyn McCormack. Edited excerpts. A complete transcript is available from BusinessWeek Online on AOL, keyword: BW Talk.

Q: Is tech rebounding with any speed? What's your opinion on the recent tech rally?


Tech spending is still weak. However, I expect that the PC-replacement cycle will begin to kick in in 2003. That will be the strongest area of tech spending. So I like PC-related stocks like Microsoft (MSFT ) and Intel (INTC ). Another key catalyst for the PC-replacement cycle is that Microsoft will stop supporting Windows 95 and 98 shortly. As far as the rest of the tech rally, especially the semiconductor stocks, I think it's a bit overdone. Valuations are up too much.

Q: Can you tell us how large it is and how it has been performing?


The fund (TEQUX ) has about $120 million in total assets. I manage about $3 billion in large-cap growth money. And I oversee $6 billion in equities. For the [last] five years, the fund is in the top 30%. For three years, it's in the top 20%, and this year it's in about the top 30%. Year to date, the fund is down about 19%.

For three years it's slightly positive, and since the inception of the fund in October, 1995, the fund is up about 9+%, vs. the S&P at about 8%. I might also add that I have a substantial portion of my own net worth in the fund because I want my money aligned with my shareholders.

Q: Back on tech and, very specifically, your opinion on Qualcomm (QCOM )?


Long-term, I am very positive on Qualcomm. I think it is the Microsoft and the Intel of the wireless world combined. Recent indications from China and Japan have been very positive toward Qualcomm's CDMA2000 technology. And it's very possible, within the next few months, it may have a major announcement with regard to new CDMA technologies in Europe. Qualcomm is about 3.7% of the fund's assets.

Q: Is the day of buy and hold over? Seems like the best way to be in the market is to swing trade.


Let's say that the late 1990s are over and the tech bubble is over, but long-term, buy-and-hold investing is not dead. Our portfolio turnover is around 35%, so that means on average we hold our stocks three years. In reality, we hold our winners five to six years, and we kick out our losers after one or two.

Q: Please give us some unknown stocks. We know about Intel and Microsoft.


One of our recent portfolio additions is Expedia (EXPE ). We believe Expedia has the best management and the best business model to capture share in online travel, and we think it could be one of the greatest growth stocks for the next five years.

Q: What sectors do you think will lead the next bull market?


I don't look at it in terms of sectors. Rather, I look at it in terms of those companies that have business models that will do well in a deflationary world. As an example, I like First Data (FDC ) because their business model takes advantage of decreasing telecommunications costs, while their basic business, which is processing electronic transactions -- credit-card and debit-card transactions -- continues to grow. I also like Wal-Mart (WMT ), because it uses its purchasing power and passes it along to the consumer in terms of lower costs. This is how I think you should think about the post-bull-market world: slower economic growth, lower inflation or, in some cases, deflation, and more normal or lower stock-market returns than in the '90s.

Q: Beyond Wal-Mart, with the holiday season upon us, do you like any retailers? Home Depot (HD ) and Lowe's (LOW ) have been mentioned, along with worries that Wal-Mart may hurt supermarkets such as Kroger (KR ) and Albertson's (ABS ).


I don't like Home Depot or Lowe's, and, in general, I would stay away from retailers that have benefited from home investments, whether it be remodeling or new-home purchases. This is a credit bubble that cannot be sustained, and I expect their sales to slow over the next 12 months. The supermarket sector is also suffering from overcapacity. The stocks, though, are attractively valued. We think Safeway (SWY ) offers some interesting turnaround possibilities and decent long-term growth. We own a 2% position in our fund.

Q: You expressed hope for the PC market. Would you be buying Dell (Dell ) at its current price if you were a long-term investor?


Dell has done a wonderful job of executing in a tough market. I think its valuation is a little rich. On a 5- to 10-year outlook, the total return on the stock is probably in line with the market.

Q: Reducing the tax on dividends -- how will that affect your investing? And growth stocks?


I think reducing the tax on dividends would be very bullish for the market. I think it will increase pressure on nondividend-paying companies to pay a dividend, especially if they have excess capital. I think a company like Microsoft would start to consider paying a dividend.

Q: What do you think will be the key trend in the markets to watch in 2003?


The key trend to watch is the level of employment. If unemployment nudges past 6%, we could be in for some more trouble. If not, we should be able to make decent returns from current levels in the stock market and the economy should be O.K.

Q: What advice would you leave investors with for the balance of the year and into 2003?


The most important decision they can make regarding investing is their own personal asset allocation, which is a reflection of their own choice with regard to risk and return. If you set your allocation appropriately, you won't chase the up markets, and you won't sell the down markets.

My expectation for the next 5 to 10 years is that stocks will offer high single-digit returns and bonds will be in the mid-single digits, and there could be a decent amount of volatility. So set your asset allocation appropriately.

Edited by Jack Dierdorff

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