Jay Feeney, CFA, Co-CEO, CIO, Robeco Investment Management, lead portfolio manager of Robeco Boston Partners Long/Short Research Fund (BPRRX)

Comments & Outlook

Real gross domestic product (GDP) growth of 1.3 percent in the second quarter showed the economy is approaching “stall speed.” A growth rate of 2.5 to 3.5 percent is needed to sustain a rebound in the labor market. The economic recovery will continue if the federal government can convince markets and rating agencies that it can slow the rising debt-to-GDP ratio. The recovery will be driven by corporate investment and household consumption, especially at higher income levels.

Further increases in stock prices will depend on continued rising earnings. Initial stock market gains from the 2009 bottom were largely driven by expanding price-to-earnings multiples. But a bias toward higher interest rates and muted GDP growth implies that future gains will be more closely tied to the trajectory of earnings. We expect stock prices to grind higher, albeit unevenly, into early 2012.

Recommended Strategies

Global macro and fiscal policy considerations have affected investor sentiment. These will not subside any time soon. As interest rates are close to “zero bound”, and stocks are pricing in a very healthy equity risk premium, active, unconstrained equity strategies should outperform fixed-income.

Strategies such as long-short that are able to deviate significantly from benchmarks by taking meaningful active bets or engaging in short positions should also enhance returns.

What to Buy Now

JPMorgan Chase (NYSE: JPM) is one of the nation’s largest banks. The lender reported a good second quarter that beat estimates due to stronger-than-expected credit card results and better-than-feared investment banking revenue. Return of capital in the form of share buybacks will be a major focus for the bank. We believe the market underestimates the true long-term value of this quality banking franchise.

EMC Corp (NYSE: EMC) is an information technology company that is well-positioned in the storage market, which is expected to grow faster than the broad sector. Increased adoption of cloud computing provides significant opportunities for EMC. The firm’s revenue is growing strongly and gross margins continue to expand. EMC’s core valuation remains attractive.

Jonathan Brodsky, Marco Priani, Co-Portfolio Managers, Advisory Research International Small Cap Value (ADVIX)

Comments & Outlook

JB: Investors’ enthusiasm for a global market rebound has been tempered by the sovereign credit crisis in Europe, deleveraging and unemployment in the US and inflationary pressures in the emerging markets. Riskier stocks—which we define as highly levered, with limited asset backing and inconsistent return on equity—have led the recent bull market rally on speculation that the global recession would be short-lived. As the rally sputters, these stocks seem overvalued relative to higher-quality issues.

Recommended Strategies

JB: Long-term trends will pressure the US dollar and we recommend that investors diversify out of the greenback by purchasing non-US equities. Our focus is on small- and mid-capitalization international value securities, which provide strong downside protection in a declining market and upside participation in an ascending market. The strategy also provides low correlation to the S&P 500 and the MSCI EAFE index.

What to Buy Now

MP: Rhoen-Klinikum (Germany: RHK) is the only listed pure-play private hospital operator in Germany, a market dominated by state-owned hospitals. Rhoen-Klinikum acquires inefficient hospitals, usually with the help of government subsidies, and turns them around. The company is now at an inflection point. A number of large hospitals in Rhoen-Klinikum’s portfolio have undergone restructuring efforts for the past three years and will soon contribute to earnings. Rhoen-Klinikum’s stock trades at 15 times forward earnings and is priced below our estimate of net tangible asset value. The company carries limited debt and its balance sheet supports a fully covered dividend yield of more than 2 percent.

Panama-based Banco Latinoamericano de Comercia (NYSE: BLX) focuses on trade finance between Latin American countries and the rest of the world. This highly defensive banking stock has a market cap of $700 million, a Tier-1 capital ratio of 18 percent, a limited number of non-performing loans and a conservative management team. The bank reacted very efficiently to the financial crisis by reducing the durations on its loans to about one year and is now rapidly growing its loan portfolio. The stock trades below book value and yields more than 4 percent.