Investing in the U.S. for a global recovery

David Ginther's shifts toward economically sensitive sectors like technology, financials and energy services. JPMorgan "a survivor and consolidator"

Sonita Horvitch 30 September, 2009 | 6:00PM
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David Ginther, senior vice-president at Waddell & Reed Investment Management Co., has been increasing his holdings in economically sensitive stocks in the U.S. dividend portfolios he manages, on evidence that the global economy is indeed recovering.

He has been boosting his holdings in technology, consumer discretionary stocks such as retailers, banks and energy services companies. "These stocks were particularly hard hit in the stock market decline because of their economic sensitivity, and some major companies in these areas have represented and continue to offer good value," he says.

In the defensive sectors, Ginther has reduced his weighting in consumer staples. "It remains an overweight position, as these companies are good dividend payers." He has little exposure to health care, another defensive area. "I consider that the pharmaceutical companies are facing headwinds with a paucity of new products and competition from generic drugs." He also has a low weighting in utilities.

The global economy, says Ginther, "has certainly bounced off the bottom, but it still has a way to go to recapture the growth rate prior to the downturn." The health of the U.S. economy is steadily improving, he adds, though the unemployment rate has yet to moderate.

U.S. equities have rallied significantly since their March lows, says Ginther. Even so, he notes that the S&P 500 Index is still some 30% off from its October 2008 peak. "It has been particularly challenging managing money over the past year."

David Ginther

Ginther manages US$1.5 billion in assets at Waddell & Reed, which is based in Overland Park, Kansas. Founded in 1937, the firm is one of the oldest U.S. mutual fund managers. Ginther's responsibilities include an energy fund and a U.S. dividend portfolio. The latter is the model for Mackenzie Universal U.S. Dividend Income, which is available in Canada incurrency-hedged andunhedged versions.

Mackenzie Universal U.S. Dividend Income has 55 names. Ginther, whose market benchmark is the Russell 1000 Index, focuses on large-cap names. He favours companies with commanding market shares that offer above-average growth in dividends and earnings, and that trade at reasonable valuations. He evaluates both the sustainability of the company's dividend and the scope for it to increase, as well as the potential for capital gains on the stock.

Ginther says it is tough for a manager of a dividend portfolio to have an overweight position in technology, as "many tech companies do not pay dividends." But he has been selectively adding to his holdings.

For example, he has doubled his weighting in Microchip Technology Inc. ( MCHP/NASDAQ), which develops and manufactures semiconductors for various embedded control applications. Microchip has become the largest holding in the fund at 3.7% at the end of August.

The company "is the global leader in its field, with its microcontrollers used in a wide range of consumer and industrial products including auto and housing." It has a strong balance sheet including cash of US$1.5 billion. Microchip started to pay a dividend in 2003 and has increased it every year since, Ginther notes. The dividend yield on the stock is around 4.9%, "which is high."

A major national department store chain that Ginther considers is poised to do well in the economic recovery is Macy's Inc. ( M/NYSE). The fashion retailer's sales have been adversely impacted by weakness in the U.S. consumer, he notes. In recognition of its challenges, "the company has aggressively reduced its overhead and carefully managed its inventory."

This has raised its profit margins, says Ginther. Also, Macy's has introduced a new concept in its retailing strategy called My Macy's "which is gaining traction," he says. Its goal is to increase sales in existing locations by better customizing the merchandising of each store to local needs.

Ginther has been moving some money back into the banks "as they were being valued as if they were going out of business." He has increased his holding in JPMorgan Chase & Co. ( JPM/NYSE), which features in the top 10 holdings and is a long-standing position.

This global financial services firm has assets of US$2.1 trillion, a strong balance sheet and high reserves. "JPMorgan proved to be both a survivor and consolidator during the high-profile financial services sector problems last year," Ginther says.

In March, JPMorgan acquired troubled Bear Stearns Cos. Inc. and, in September, it bought the banking operations of Washington Mutual, a failed lender seized by U.S. regulators. "JPMorgan has thus increased its market share in a number of its main businesses," he says. Also, "the failure of competitors such as Lehman Brothers has reduced the number of JPMorgan's competitors in the capital markets business."

The stock of a leading global energy services provider, Schlumberger Ltd. ( SLB/NYSE), came under pressure earlier this year, and Ginther took the opportunity to add to his existing holdings. There were concerns, he says, that the low oil price would dampen the level of drilling activity.

His call is that the oil price, which has doubled off its low of US$35 per barrel earlier this year, will continue to rise with the global economic recovery. "Demand for energy should increase faster than supply," he says and the demand for industry services should revive with an improving oil price. "Schlumberger is a market leader in energy services technology and has a large market share in the fastest growing oil spots around the world." The stock is in Ginther's top 10 holdings.

In the more defensive consumer staples sector, Ginther has reduced his weighting in a number of these stocks and eliminated his holding in PepsiCo ( PEP/NYSE) "There are other consumer staples stocks that I consider have better prospects, such as tobacco company Lorillard Inc. ( LO/NYSE)."

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Sonita Horvitch

Sonita Horvitch  

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