Investment outlook: Three winning stock fund managers in 2010 make predictions

By Erin Schulte
Special to The Washington Post
Saturday, January 8, 2011; 11:08 PM

Investing in stocks in 2010 was a white-knuckle ride. Spring kicked off with the largest oil spill in history, and energy stocks were punished. The Dow Jones industrial average dropped a thousand points in a single day in May. Americans continued to question the strength of the U.S. economic recovery, and incessant talk of a double-dip recession dogged investors all summer. Unemployment numbers remained grim. And if you bought a house at the market peak, well, forget about getting out from under that mortgage. But as always, despite the bleak chorus of talking heads, there was money to be made in stocks.

More important, there were many ways to make money in stocks, as we discovered by talking to managers of three of the best-performing stock funds from 2010. One saw an opportunity in energy companies that sold off steeply after the oil spill in the Gulf of Mexico. Another profited from the telecom sector, on the hunch that cellphone service providers, in response to complaints about dropped calls and dead zones, would spend big to patch up notoriously spotty networks. And the third looked to emerging markets to outperform U.S. companies - though this year he's turning his focus back home.

We asked the managers about the most compelling investment ideas for the coming year, what will drive growth in 2011 and how they're re-configuring their portfolios for another successful run across a changing investment landscape.

Brian Barish, Cambiar Aggressive Value fund

The Cambiar Aggressive Value fund excelled in 2010 in part by making the best of a very bad situation: the Gulf of Mexico oil spill. Fund manager Brian Barish says the fund took a "brick to the forehead" from its large stake in BP at the time of the Deepwater Horizon explosion. Barish unloaded all of its quickly plummeting BP position by May and compensated by taking advantage of ripe opportunities elsewhere in the energy sector. The fund ended the year up 39 percent, outpacing the Standard & Poor's 500-stock index by 24 percent and other large-value funds by 25 percent, according to Morningstar. The key to success, Barish says, is finding stocks that are unfairly inexpensive and concentrating money there.

Washington Post: Can you tell us a bit about your strategy of investing in stocks that are inexpensive because of temporary negative issues?

After the gulf oil spill, the whole sector sold off ¿ integrated oil companies, exploration and production companies, offshore drillers ¿ which also created situations that worked for us.

Why is oil [around $90] a barrel today? There is an inexorable demand coming mostly from Asia. We're not finding giant oil fields to drill, and they're complicated to get to. Have any of these facts changed because BP had a terrible accident? Not in the slightest. In fact, the fact that we're being more restrictive about drilling will tighten up global oil supply. We put on several energy positions that sold off rather badly in the summer, and those have been very profitable: Apache, Repsol, Devon Energy and Halliburton. They're clearly undervalued in terms of reserves they have versus long-term price expectations for oil and gas.

WP: What market and economic trends do you think will shape the investment story in the year to come? What are people not talking about yet but will be in December 2011?

For most of the last 18 months, financial media have been dominated by negative chatter about why this economic recovery is going to be below par. There are a lot of structural issues in the U.S., but they mostly pertain to credit and the stuff credit attaches itself to, like housing and commercial real estate. We had a bubble, we massively overbuilt, and that excess inventory will take years to clear off.

But there are a lot of positive stories that were not part of this credit bubble. Oil and gas, technology and industrial America are doing really well and are positive sector stories going into 2011.

The consensus going into 2011 is underestimating the strength of the recovery.

I'm not an economist, but I think you could have GDP growth of 3.5 to 4.2 percent, driven by business investment. One of the items that got thrown into the Bush tax-cut extension was accelerated depreciation for businesses, where they can expense 100 percent of capital expenditures in 2011 and 50 percent in 2012. Let's say you're a company that wants to do a full information technology upgrade. You'd have to have your head examined not to do it in 2011. You're going to see very aggressive business capital spending.

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