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Why You Should be Bullish on Banks, Tech and Consumer Stocks Now

Fund manager Villalta talks about which sectors are hot

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Q: Let’s talk about the risks to the rally right now. What’s your biggest concern that could cause trouble for the market in the next several months?

A: First, let me note that I don’t view Europe as a significant risk in the intermediate term. Keep in mind that the U.S. economy is not as dependent on exports as countries like Japan, Germany and China. Moreover, concerns about Europe are, in our view, more than priced into the market. Any volatility related to Europe is, in our view, noise.

So … the real concerns are unknown “exogenous shocks.” Iran and other Middle East issues always pose problems, as their effects are not, in our view, priced into the market. A significant upward increase in commodity prices, whether it’s related to Middle East tension or increased global demand, remains problematic. While the world in general is becoming a more efficient user of energy, we still feel significant upward movements in energy prices are problematic for all economies — including the U.S. economy.

In 2008, we found that oil pricing that exceeded $145 per barrel became a significant drag on consumer spending (and likely contributed to the U.S. economy’s contraction in GDP). While we currently think oil prices can go higher than $145 per barrel before they become problematic — due to an increasingly efficient U.S. demand base — we’re not sure what the ultimate problematic price is.

Q: Longer-term, do you have any doubts about the sustainability of the rally? Is there any chance of a “double dip” or are we really on the mend, albeit slowly?

A: We do think we are on the mend. But, as you note, it has been a slow recovery. At some point the recovery will become self-sustaining and growth will beget more growth. I’m not sure if we are at that point now, but we are headed in that direction (we may be there now, but it is really only clear in retrospect). Again, commodity prices could impose a headwind, and we would caution investors to maintain some exposure to energy as a hedge (we currently maintain a market-like weight for this very reason).

Right now, I’m not concerned with a double-dip, as corporations are generating significant cash flow and have fortified their balance sheets. While they have been slow to hire, dragging out the recovery process, the upside is that they likely will be less inclined to layoff employees should we see a bump in the road, or a sustained rise in commodity prices.

Q: Do you place any stock in “Sell in May and go away” motto this year?

A: While that adage has served investors well over the past couple of years, we don’t think it’s something to count on. It may be a difficult summer, but we wouldn’t bank on it — especially given the pullback in April.

Q: I notice that the JVOFX fund has a pretty high expense ratio of 4.19%. Your performance has been such that investors recoup those fees, but some folks may be worried that in an off year they will feel the pain twice. In your own words, why is Jones Villalta worth the price of admission?

A: 1.25% is the actual net expense ratio for JVOFX. The 4.19% expense ratio you noted is our gross expense ratio. Our firm subsidizes expenses for the fund to maintain a ratio of 1.25%. It will be a great day when we are no longer writing checks to keep the fund’s expenses at the industry average!

Investors have a choice: They can pay a small price for a passive investment fund (like an index fund), or they can pay for active management. But they should be concerned about actually getting active management. Many funds that assert they are actively managed hold too many securities and are unlikely to outperform market benchmarks given their expense ratios. While many investors are well served by having a portfolio that includes both actively managed funds and index funds, as they can complement each other, we do think that when selecting active funds, investors should strive to seek truly active funds — not funds that are too timid to hold over-benchmark-weight sector positions or sizable individual positions.

Our fund is truly actively managed. We very often don’t look like our benchmark, the S&P 500 Index. This has allowed us to add value over time and is the reason that we’ve outperformed our benchmark since inception.

Outperformance, however, comes with a cost — both in terms of expense ratio and in terms of tracking error. We are not as cheap as an index fund, and there will be periods when we underperform. We are focused on the long term, and over the long term we’ve done, in our view, a good job adding value.

Jeff Reeves is the editor of, and the author of “The Frugal Investor’s Guide to Finding Great Stocks.” Write him at editor@investorplace??.com or follow him on Twitter via @JeffReevesIP. As of this writing, Jeff Reeves did not own a position in any of the investments named here.

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