Stocks can go green, stocks can go red. Preparing for both is important. (Photo by Spencer Platt/Getty Images)
Investment out-performance is a rare commodity on Wall Street due to a roaring bull market that’s left most active managers in the dust. For those who are beating the market, having a good defensive plan for the inevitable downturn is paramount.
Take Adam Abelson, portfolio manager of the $136 million Stralem Equity Fund. He runs a stock-only portfolio that acts more like a balanced fund that holds an allocation to the safety of bonds. Abelson avoids bonds for the favor of stocks, but his twist is to split Stralem’s portfolio into what he calls "up market stocks," growth companies that should outperform in bull markets, and "down market stocks" like utilities and consumer staples that preserve capital during bear markets.
This common sense strategy, a bedrock of family-owned Stralem & Co, has yielded impressive results. Not only has Abelson’s Equity Fund outperformed balanced funds, it’s also beaten the soaring S&P 500 over the long haul. Net of fees, Stralem’s Equity Fund has returned 11.3% annually over five years, 9.4% over ten years and 10.8% over twenty years, beating the S&P 500 by between 2% and 2.8% a year. Having a good defense is valuable.
Case in point, during the crisis of 2008 Abelson’s fund fell 28%, far less than the S&P’s 37% plunge. That meant he didn’t need to make up ground in the recovery and has happily kept a defensive tilt even as other managers chase at risk. Among Stralem’s concentrated portfolio of 25-to-35 stocks with market capitalizations exceeding $4 billion, Abelson offers two names for offense and one with safety in mind.
A top-five holding for Abelson and a long-term winner for Stralem is this Silicon Valley money spigot. Its free cash flow last year jumped 55%, buoyed by predictable Creative Cloud and document cloud subscription revenue. Even after a near doubling of the stock over the past year, Abelson remains a bull expecting Adobe will soon use its underlevered balance sheet to implement a dividend. Recent guidance, offered in October, gives fundamental support to Adobe’s bull run, says Abelson.
For long-term upside in global health, Stralem favors this lab-equipment giant, a leader in bloodwork mass spectrometers, over drugmakers or those dependent on government contracts. Thermo Fisher is the perfect marriage of Abelson’s growth and defense tilt. Healthcare is a stable bet on the rise of the global middle class, it’s also one of the fastest growing and hottest sectors on the market. Instead of taking the research risks of a drugmaker like Celgene or Abbott, Abelson is happy owning the equipment provider both companies use when studying new drugs. Acquisitions are a growth area where Abelson believes Thermo Fisher excels, buying up Life Technologies, Affymetrix and most recently Pantheon.
The unsexy utility is Abelson’s favorite downside protection, thanks to its choice mid-Atlantic/Northeast footprint–and its expected 10% dividend growth rate. Though Dominion is not a cocktail party stock, over two thirds of global internet traffic travel through the Northern Virginia corridor where it operates. The company’s extensive pipelines, many connecting to exciting new natural gas export terminals, also make it a play on the American energy revolution.
Other top holdings at Stralem include Visa , UnitedHealth, Intercontinental Exchange, FedEx , recently surging Oracle and DowDuPont, the merged and soon to be split chemical and agricultural amalgam of Dow Chemicals and E.I. Du Pont de Nemours.