If you’re looking for diversification between stocks and bonds in a single fund, Westwood Income Opportunity (WWIAX) is an example.
The fund’s holdings tilt conservative now that the economy is in a precarious state. Helfert doesn’t see stocks moving much in coming months, but thinks bond prices can continue their recent rise.
In the stock arena, he likes the energy and financial sectors. Among bonds, he particularly likes investment-grade paper.
The Westwood fund has returned an annualized negative 4.31% for the past year, positive 4.84% for the past three years, positive 4.13% for the past five years and positive 4.53% for the past 10 years, according to Morningstar.
TheStreet recently spoke to the fund’s co-manager Adrian Helfert, chief investment officer of Westwood’s multi-asset strategies. Here are Helfert’s comments, including stock picks.
TheStreet: What is your investment philosophy?
Helfert: We believe in fundamental analysis, which leads to underlying investments and allocation decisions. Are there quality cash flow? We look for consistency and repeatability. We’re not looking for the new thing. We also need to be aware of macro conditions. That allows us to screen for new opportunities. So we bring together a top-down analysis with bottom-up.
TheStreet: Are all your holdings conservative?
Helfert: No. There are times when we’re more conservative and less conservative. We have a more conservative position now, though not relative to our peers. We’re more conservative because we want to see more transparency as to when the Fed will take its foot off the brakes.
We want to see how much inflation and unemployment we’ll have and where we are in the economic cycle. We see a 50% chance of recession in the next 12 months. The virtuous part of the credit cycle has ended, and it can quickly turn vicious. Consumption is likely to shrink, and we will see unemployment rise in delayed reaction to tighter monetary policy.
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TheStreet: What’s your general outlook for stocks and bonds in coming months?
Helfert: We think the stock market is fairly priced, though there will be volatility throughout the year. Volatile periods create an attractive environment for buying high-yield bonds. We see more flows into investment-grade corporate bonds too.
Westwood
TheStreet: What areas of the stock market do you find attractive now?
Helfert: We’re overweight energy in several of our portfolios. As much as we saw energy assets appreciate last year, price-earnings ratios went down. These companies can generate cash flow at oil prices considerably below where they are now. Factors such as the Ukraine war and underinvestment in new energy sources continue.
Financial stocks were hit with concerns about deposit flight after the bank failures, but there are those who will benefit, as we saw with JPMorgan. We are looking at financial companies that could benefit from alternative lending or capturing deposits. Deposit flight isn’t happening broadly across the industry.
TheStreet: What areas of the bond market do you find attractive now?
Helfert: Higher quality looks better than lower quality. If there’s an economic downturn, high quality is much more economically conservative. We’re weighted toward higher quality now. There are also convertible bonds, which give investors a way to access a company’s growth in profits and an income stream.
TheStreet: Can you discuss three of your favorite stocks?
Helfert: 1. Energy Transfer LP (ET), [which owns a large platform of crude oil, natural gas, and natural gas liquid assets primarily in Texas and the U.S. midcontinent region.] It has large assets across multiple value chains, providing diversity. It has a stable cash flow. Its distributions to shareholders are back to pre-covid levels. They were highly leveraged, but it has come down to their target. Their valuation is unjustifiably low relative to their peers.
2. Microsoft (MSFT). They’re well positioned in the cloud and artificial intelligence, two of the fastest-growing areas of the economy. They have a sustainable business [including older products such as Windows] with cash flow that allows them to invest. They are conscious of returning cash to shareholders. They have solid growth compared to their peers. They’re able to ride out macroeconomic problems better.
3. Blackstone (BX), [the world’s largest alternative asset manager]. It just raised $30 billion for its latest real estate fund. It will be a huge beneficiary of banks pulling back from real estate, its biggest business. Blackstone is ready to deploy capital when others can’t. It can manage properties. Banks can’t. Blackstone also has strong private equity and credit businesses. Distress is generally when they achieve their best returns. Their operating margins are nearly 50%.
The author of this story owns shares of Microsoft and Blackstone.
