Bringing it Back Home
TAMRO Capital
By Philip Tasho
July 27, 2012
Bringing it Back Home
After a strong first quarter, which saw double digit stock market returns and hope for an acceleration in the domestic economy, reality came back this past quarter to remind investors that it is a slow, atypical recovery and has been since The Great Recession ended in June 2009. Perhaps the flip side to the recession should be called The Sloth Recovery.
We have been saying that Government will likely pull the correct levers to move us forward. Unfortunately, what one hand giveth - low interest rates and liquidity from the Federal Reserve, the other hand taketh away, with more regulations and fear of higher taxes. That is the conundrum in the markets and in the economy. However, the United States has historically been a clever, innovative and entrepreneurial country that has always measured up to the challenge. The U.S. is still in the lead globally, with the state of its economy and with some of the best stock market returns for the third year in a row.
While the second quarter of 2012 reflected a shift favoring more defensive sectors in the stock market, the Consumer Discretionary, Financial and Health Care sectors have delivered the strongest returns year to date. Consumers are deleveraging after a large debt build up that took years to accumulate. While the unwinding could also take years, the domestic consumer is waking up after a 4-year slumber. Most companies focused on the consumer have downsized, restructured or gone away, leaving the survivors stronger and with fewer competitors.
The American consumer is in the forefront and is bringing the domestic economy back. Nothing is linear; however, the consumer comprises two thirds to seventy percent of our economy, higher than any other country globally. Just as the emerging markets and commodities were in the vanguard over the last ten years, the emerging trend is bringing it all back home to America. Our financial system has been cleaned up and recapitalized; consumers have paid down debt and seem to be looking to buy houses again. A large part of the improvement in the domestic economy is centered on the housing revival. It is not rapid - again, it’s a slow recovery - but at least we seem to be moving forward. We remain optimistic about the trends taking place in the domestic economy and will use volatility in the markets to add to positions or establish new investments that corroborate our thesis and investment philosophy.
Portfolio Positioning
Last quarter we took profits in the Technology, Industrials and Energy sectors and redeployed the proceeds in the Health Care, Consumer Discretionary and Consumer Staples sectors. Lower earnings guidance from many companies with overseas operations was the fundamental catalyst, with weak valuation support corroborating our decision to take profits in those sectors. The changes this quarter are a continuation of what we started at the beginning of the year. At quarter end, Financials, Health Care and Consumer Discretionary were the three largest sectors. Financials still provide opportunities to invest in leading companies at attractive valuations. Now that the Supreme Court has ruled on health care, there is greater clarity of operating trends for companies in that sector. As consumer spending continues to improve, there is an opportunity for operating margins to expand for many companies in the Consumer Discretionary sector.
At quarter end, TAMRO’s three fundamental investment categories Leaders, Laggards and Innovators represent 73%, 8% and 19% of the portfolio, respectively, a decrease in Leaders of 6% compared with last quarter and an increase in Laggards and Innovators.
Second Quarter 2012
For the second quarter, the TAMRO Diversified Equity Composite underperformed the benchmark, the Russell 1000 Index. The underperformance relative to the benchmark was the combined effect of stock selection and sector allocation. Stock selection in the Consumer Discretionary, Financials, Industrials and Technology sectors detracted from portfolio performance, while selection in the Consumer Staples, Energy and Materials sectors benefited the portfolio. During the period, sector allocation was negatively impacted by the lack of exposure to the Telecommunications and Utilities sectors.
(c) TAMRO Capital
