Sequestration in the United States and fiscal caution throughout Europe have replaced the spending spree governments went on to revive the global economy after the 2008 financial collapse. China's spending has also been curtailed amid fears over inflation and rising debt.
When they do spend money, governments often sponsor infrastructure improvements that boost demand for materials and goods made by cyclical companies. That hasn't happened. The two purest cyclicals in the 30 Dow Jones Industrial Average stocks, Alcoa and Caterpillar, are the only ones showing a decline, with losses of about 5.5 percent this year versus the Dow's 16.89 percent rise.
Managing expectations and investing for the long term. The stock market's big gain this year worries some people who see prices getting ahead of earnings potential. O'Brien says that as a fund manager, he prefers to lean out of the bull market by finding less economically sensitive stocks. "Of course, what matters is how they do in the long term," he says. He cites Warren Buffett's strategy of investing in steady, plodding companies that generate cash.
O'Brien likes consumer name brands, especially those with potential to spin off new products under the same brand. He has invested in Church & Dwight, which has a stable of consumer products it has extended into new products, which has been a relatively low-cost income booster. The company has taken Arm & Hammer baking soda into cleaning products, toothpaste and deodorizers. Another of his favorites is PepsiCo, which has used the same strategy in pushing new products like chewable forms of its Gatorade drinks.
O'Brien also follows Buffett's strategy of buying insurance stocks for steady and reliable returns, especially in the property and casualty area, which has low exposure to long-term bonds seen as risky in the current environment. Life insurers tend to be bigger investors in long-term markets because of their longer, annuitized payouts.
How the fund stacks up. The Prospector fund is "above average" in terms of performance, says Todd Rosenbluth, director of fund research at S&P Capital IQ. "They invest in the kind of companies that do well regardless of the strength of the economy because people will still eat and drink and smoke and go to the doctor and keep living in the real world."
But Rosenbluth says S&P's view is that the economy will pick up momentum. "You might want to start mixing in some cyclicals" to participate, he says. Still, "if you take a long-term view of the economy being stable but growing at a 1 to 2 percent clip, you want to be in funds like Prospector," he adds. One reason to do so is that these funds tend to be good dividend payers. He says Cullen High Dividend Equity Fund, Dreyfus Appreciation Fund, and Invesco Growth and Income are other good funds for this environment.
Prospector performed relatively well in the 2008 downturn with a 19 percent drop that was about half the benchmark's loss, says Rosenbluth. O'Brien says his fund's focus on risk will be important going forward. "I would be the first to admit that we could not do as well in a booming market and economy," he says. "But that's not how we are seeing it play out."