NEW YORK: Healthcare stocks, high-quality small-cap companies, and Mexican bonds are among the assets most likely to beat passive indexes in the year ahead, according to portfolio managers who presented at the Legg Mason Investor Day in New York on Wednesday.
Scott Glaser, who helps oversee $101 billion in assets as co-chief investment officer at ClearBridge Investments, said the firm is "not finding a lot of sector valuation anomalies," leaving him to look at smaller sub-sectors for opportunities.
Technology hardware firms, insurance companies, and pharmaceutical stocks are among areas that now look promising, he said.
Chuck Royce, a noted small-cap company investor who oversees the $6.4 billion Royce Pennsylvania Mutual Fund , said the US Federal Reserve's quantitative easing program was behind the rally in lower-quality small-cap companies since the current bull market began in 2009.
Now that the Fed is close to ending its stimulus program, higher-quality firms like Reliance Steel and Aluminum Co should perform better than small-cap firms whose balance sheets are shakier, Royce said.
Equity fund managers' apparent need to make the case for active management underlies the shift in investor behavior toward low-cost, passive index funds since the 2007-2009 financial crisis.
Last year, investors put approximately twice as much money into passive funds as actively managed ones, according to fund tracker Morningstar, even as the broad Standard & Poor's 500 index rallied by approximately 30 percent.
Typically, that sort of market rally has nudged investors to opt for stockpicking fund managers over passive funds that track the broad market.
Actively managed fixed income funds have been more successful at drawing investors, in large part because investors in the asset class typically prize capital preservation over growth.
David Hoffman, who oversees the $3.5 billion Brandywine Global Opportunities Fund, said that he expects the bond market to continue to perform better than consensus expectations.
His biggest positions continue to be long Mexican bonds and the peso, he said. "It's getting to be a crowded trade, but we think there's still value there," he said.
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