Best U.S. Stock Manager: Don’t Fixate on Economy in ’15

Investors who relax about the economy and focus on company earnings and valuation have the best shot of beating the market in 2015, according to the co-manager of last year’s best performing U.S. equity fund.

Technology and health-care companies are among the top industry picks of Vladimir De Vassal, head of quantitative research at Glenmede Investment Management LP, which manages $8 billion in Philadelphia. Cutting energy shares helped the Glenmede Large Cap Growth Portfolio return 20 percent last year, the biggest gain among broad stock-based mutual funds in the U.S., according to data compiled by Bloomberg.

“Hopefully investors focus on stocks and don’t allow their behavior to be driven by macro issues,” De Vassal, whose fund uses quantitative signals on earnings surprises, valuation and chart patterns, said in a phone interview on Jan. 2. “Overall we’re expecting a modest growth period, and generally with modest growth you have normal to low volatility.”

The Standard & Poor’s 500 Index rallied 11 percent in 2014, bringing its three-year advance to 64 percent and its return since the bull market began in March 2009 to more than 200 percent.

Bull Market

Anyone using above-average economic gains as a signal to buy would have missed the advance in the S&P 500 since March 2009 that rivals almost any rally in the past nine decades. From March 2009 through June 2014, the S&P 500 has increased 4.7 percent a quarter, about five times faster than gross domestic product, data compiled by Bloomberg show. That’s the biggest gap since at least 1947.

The Glenmede fund’s biggest holdings in 2014 included Amgen Inc., the Thousand Oaks, California-based biotechnology company that rose 40 percent; wireless chipmaker Skyworks Solutions Inc., in Woburn, Massachusetts, which soared 155 percent; and Omega Healthcare Investors Inc., a real estate investment trust in Hunt Valley, Maryland, that climbed 31 percent.

Medical stocks in the S&P 500 have trounced the market since the end of 2012, rallying 71 percent through the end of last year to beat their nearest competitor, consumer discretionary, by nearly 20 percentage points. De Vassal said utilities also helped in a year when their 24 percent advance was the biggest among the broader index’s 10 main industries.

“Last year was one where picking stocks mattered,” he said. “Stocks with lower and more attractive valuations, as well as those with positive earnings surprises, did better within sectors than their peers.”

Discretionary, Energy

The Glenmede fund also benefited by deemphasizing energy producers and makers of nonessential goods. The S&P 500 Consumer Discretionary Index rose 8.1 percent in 2014, the index’s sixth-biggest gain, while its gauge of oil and gas producers slid 10 percent, the largest loss.

“We were overweight energy early in the year, then moved to a negative weighting in the third and fourth quarter, which was a positive influence,” De Vassal said. “It wasn’t a large bet, but it had a positive impact.”

Oil’s 50 percent decline from a June created improved signals on spending and led the fund to boost its view of the consumer industry to neutral, he said. Transportation-based industrial stocks are also looking better.

The Glenmede Large Cap Portfolio consists of about 80 stocks and has been in the 99th percentile of funds tracked by Bloomberg over the past five years. The firm uses an investment strategy through which it holds stocks for at least 12 months, reducing sensitivity to short-term price swings and enhancing the role of company fundamentals, according to De Vassal.

“Over a 12-month period, valuation and earnings do matter, and that’s why our portfolios have had consistent performance,” De Vassal said. “We’re not shooting for the fences. It’s a disciplined monthly approach where we just try to have a high batting average by owning a lot of names.”

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