JERSEY CITY, N.J. ( TheStreet) -- Christopher Towle, manager of the Lord Abbett Capital Structure Fund ( LAMAX), buys what he calls "packages," or different types of investments in the same company. He's bullish on some global generic-drug firms.The $1.4 billion Lord Abbett Capital Structure Fund follows such a strategy, providing exposure to equities, bonds and convertible securities. The mutual fund has risen 4.1% this year, putting it ahead of 85% of its Morningstar category peers. Over the past year, the fund has returned 35%. Welcome to TheStreet.com's Fund Manager Five Spot, where America's top mutual fund managers give their best stock picks and views on the economy in a five-question format. Are you bullish or bearish? Towle: After a declining trend that started in 2007, corporate earnings now appear to be in the early stages of an upswing. The scale of the profit increases may not be as dramatic as we've seen in past recoveries, but we believe a revival is currently under way. Given the trajectory of earnings growth on the S&P 500 Index and an earnings multiple of 16.5 or 17 -- which is justified in an environment of historically low interest rates -- that may indicate a market level of 1,300 to 1,400. That could imply a period of steady returns heading into 2011 and beyond. From a monetary-policy perspective, it is widely recognized that the Federal Reserve will lift interest rates in the not-too-distant future. Even when that happens, the interest-rate environment will remain conducive to economic expansion as corporations' excess capacity should keep any inflationary surge at bay. What is your top investment pick? Towle: We're positive on a package of investments in the health-care industry. The term "package" refers to multiple investments that may be in the same company, but at different points in its capital structure. Depending on where we see the most attractive opportunities at a given time, these investments could be in the company's common stock, convertible securities or bonds. In terms of sectors, some global generic-drug firms, such as Mylan ( MYL), may capitalize from the patent expirations of several name-brand drugs and from a potential increase in market share as health-care reform takes place. Elsewhere, we believe some specific biotech companies have products that may be attractive to large pharmaceutical companies that may have dwindling drug pipelines.
In either case, we think these companies will experience an increase in demand. In cases where this demand may emerge gradually, it may make sense to invest in both the common equity and the convertible debt of the company. That way we can receive some income from the convertible issue while waiting for the potential capital appreciation from the equity exposure. What is your top "under the radar" stock pick? Towle: SAIC ( SAI) provides technology support for the U.S. government, which is a business that has a fairly high barrier to entry. With more information being shared over computer networks, we think the U.S. government will continue to enhance its security against cyber attacks and intrusions, and this should promote growth at SAIC. The company's relationship with the government, which often requires confidentiality in terms of contract details, is part of the reason why it trades at such a reasonable multiple of about 14 times 2010 earnings. As branches of the government continue to bolster their technology defenses, the company has the potential to grow at a rate of 20% a year over the next three years. What is your favorite industry? Towle: The Capital Structure Fund's portfolio is managed by a team, and each member brings a different area of expertise to the table. When I received the recommendation to increase our technology exposure slightly over a year ago, I was slightly skeptical, but that recommendation has been highly accurate. More specifically, companies responsible for the physical construction of wireless data networks are playing an increasingly important role in the availability and reliability of those transmissions. The use of handheld computing devices has developed way beyond phone calls, and there is an immense amount of bandwidth needed to handle that information. The stakes for wireless-data providers are high, since spotty or nonexistent coverage can lead to increased levels of customer turnover. Although shares of the companies in the wireless network construction industry recovered strongly in 2009, their profit margins are attractive, and the companies should experience strong growth over the next several years. Which sector would you avoid? Towle: Although the home-construction industry has displayed some signs of stabilization along with the rest of the market, it is one industry that we do not view as particularly attractive. Home prices may not be declining as rapidly as they once were, but it is difficult for us to envision a new earnings growth cycle within the homebuilding industry.
-- Reported by Gregg Greenberg in New York.