The death of the 60-40 portfolio apparently has been exaggerated.
That’s a portfolio made up of 60% stocks and 40% fixed-income assets. It has been the rule of thumb for asset allocation over the years. However, some investors abandoned it after stocks and bonds fell in 2022.
The model has been performing better recently, so it might be a good time to look at investment possibilities for balanced funds offered by Wall Street.
One of those funds is Osterweis Growth & Income Fund (OSTVX) , with $177 million in assets. Osterweis has $7.4 billion of assets under management in total.
The fund has about 60% of its assets in stocks and 40% in bonds and cash
Osterweis
Osterweis investment philosophy and stocks
The fund has annualized returns of 14.08% for the last year, 4.43% for three years, 8.91% for five years, and 6.63% for 10 years, according to Morningstar. That beats a Morningstar index, which includes the balanced-investing category for all those periods except over 10 years.
We recently spoke to one of the fund managers as part of TheStreet’s Expert Interviews series.
Nael Fakhry explained the fund’s philosophy and several of its stock picks.
The fund hunts for quality growth stocks and 90% of its stocks pay dividends. Among the stock market themes Fakhry and his colleagues find attractive are the cloud, digital advertising, and onshoring. Here are his comments.
TheStreet.com: What’s your investment philosophy?
Fakhry: In equities, we look for quality growth with attractive valuations. Capital appreciation is the driver. High quality means the company should hold up better in weak economic periods.
Our quality-growth companies have three attributes. That’s competitive advantages, the ability to reinvest to drive growth, and management teams who are focused on shareholders and the long term.
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We want high and improving returns on investment capital, attractive margins and pricing power. The companies generally don’t need outside capital to grow and have rising free cash flow.
On the fixed-income side, we look for significant income with less volatility. So overall, we seek equity-like returns with less volatility.
That’s a powerful combination for our core investors. These are individuals who are approaching retirement or are in it, foundations and endowments.
Stocks v. bonds
TheStreet.com: How do you determine your weighting between stocks and bonds?
Fakhry: We’re bottom-up investors, so we’re constantly looking at securities. We tend to run about 60% stocks and 40% bonds and cash.
TheStreet.com: What’s the significance of dividend stocks for your fund?
Fakhry: Dividend growth stocks – companies that pay growing dividends – account for about 90% of our equity portfolio. We aren’t looking for large dividend payers.
The dividends are a byproduct of quality growth, not the main attraction. We prefer companies that reinvest most of their cash. That they can also pay dividends or do share buybacks is a great outcome. The dividend yields are often pedestrian.
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TheStreet.com: What industries/market themes do you find attractive now?
Fakhry: One is the cloud; it’s growing fast and has the runway to continue. It’s part of modernizing information technology infrastructure for companies. It will benefit from artificial intelligence and growth in e-commerce, which has only 20% penetration in the U.S.
Digital advertising is another. It allows companies to spend a small amount to test their ads. There are so many small advertisers that couldn’t historically play a part in the business but can with digital advertising.
Also, there’s onshoring and nearshoring. [That means moving manufacturing closer to a company’s home country]. We’re seeing a lot of activity in Mexico [by U.S. companies].
Three of Fakhry’s stock favorites
TheStreet.com: Can you discuss three of your favorite stocks?
1. Accenture (ACN) , the world’s largest IT consulting firm. Its advantage is scale. If a big company has an issue, it can hire Accenture. It can provide strategic consulting on the problem and then help with the implementation of the solution.
Business-process outsourcing is almost half of Accenture’s business. It’s the only company that can do all of that globally.
Accenture had a slowdown for six quarters because Covid pulled forward technology spending and AI crowded out other software spending. But demand appears to have bottomed, and companies need to invest in technology.
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2. AutoZone (AZO) , the country’s largest auto parts retailer. Its scale allows it to offer consumers lower costs. It has so many stores that it’s highly convenient. If your battery is broken or a repair shop needs a part, convenience is important.
Sales to repair shops are growing faster than consumers because cars are getting more complicated. There should be great long-term growth for that.
AutoZone had a revenue slowdown for a while. But we think there will be a reacceleration of growth. The company has no dividend, but that’s ok. It generates a lot of cash.
3. Amazon (AMZN) , [the retail/technology giant]. Amazon Web Services (AWS), the company’s cloud division, accounts for 17% of revenue and over 60% of profit. The rest is retail. Amazon’s scale is very important in the cloud and retail.
There was a period where Amazon overbuilt in logistics and fulfillment, and e-commerce and AWS slowed.
But now AWS is reaccelerating. Amazon dialed back logistics, and advertising grew 24% last quarter. Amazon should have free cash flow of more than $60 billion this year and over $100 billion in two years. We think they will buy back shares and may start a dividend.
Related: Veteran fund manager sees world of pain coming for stocks
The author owns shares of Amazon.
