Top Fund Managers Still Selecting Winners

Editor's note: As part of our partnership with PBS's Nightly Business Report, TheStreet's Gregg Greenberg joined NBR to discuss fund managers' top picks in a slow economy. (Watch video)

NEW YORK (TheStreet) -- Top mutual fund managers are finding a way to make money as the economy slows.

"It's going to take a while for the economy to get back on its feet without relying on stimulus," says Matt Eagan, who helps manage the $19.1 billion Loomis Sayles Bond Fund ( LSBDX). "We are going to grow, but it's going to be at a modest pace, below expectations."

The Loomis Sayles Bond Fund has returned 22% over the past year, better than 85% of its peers.As for stocks, the S&P 500 yesterday extended last month's 6.9% gain after an April-to-June decline brought on by concerns of slowing economic growth. Even as most companies are beating analysts' earnings estimates, economists say the unemployment rate probably rose last month, producing choppy stock-market returns.
Word on the Street

To capitalize on his cautious economic outlook, Eagan is loading up on bonds from Bank of America ( BAC) and Citigroup ( C). The fund manager says the bailed-out banks are clearing away liabilities after the financial crisis and are making generous profits without taking on excessive risk.

Eagan is also heavily invested in cash-rich industrial companies, as well as Ford ( F), which said it had its most profitable first half of the year in more than a decade.

The bond fund manager is also persistently reminded by the press -- and his equity-side peers -- about a so-called bond bubble. While he admits they make a good argument for stocks, Eagan says the environment continues to favor bonds, especially high-quality ones paying healthy yields.

"It's going to be difficult for the equity market to have a lot of momentum considering the weak economy," says Eagan. "So as long as we remain in this slow-growth mode, corporate bonds will be the better alternative."

Travis Takes Stocks

Unlike fixed-income manager Eagan, Intrepid Capital Fund ( ICMBX) manager Mark Travis deals solely in stocks. He has a superior record of picking the right ones, generating average returns of 7% over the past five years, exceeding 99% of his mid-cap peers.

Similar to Eagan, however, Travis expects growth to be slow in the second half of the year as consumers and governments dig their way out of debt.

"It's just tough out there. We have a lot of leverage in the system, probably 3.5 times our GDP of $14 trillion," says Travis. "We are going to have to work it off the hard way, either by repudiating it or paying it down."

Still, Travis says he's finding attractive investments. In fact, some of his best ideas are a result of his less-than-sunny outlook. Rent-A-Center ( RCII), which leases household goods on a rent-to-own basis, for example, is a perfect business for the current environment, according to Travis.

"Today, there are over 3,000 Rent-A-Center stores generating over $200 million in free cash flow," he says. "Their debt has been brought down in the last year and they just initiated a dividend."

Epiq Systems ( EPIQ) is another company with a popular product for difficult times. Epiq provides software for bankruptcies, and Travis says it will really shine once interest rates rebound.

Europe's Diamonds

Madelynn Matlock, manager of the Huntington International Trust ( HIETX), says there are gems in Europe even amid several countries' debt woes. The $286 million fund has returned more than 10% in the past year. Over the past five years, Huntington International Trust has risen an average of 4.2% annually, beating 80% of its large-cap, foreign-stock rivals.

"Europe is going to be volatile in the near term while they're working out their problems with the European Union, so we are currently underweight the region, yet eventually it's going to be a very interesting place to invest more money," says Matlock.

Despite the euro zone's debt problems, Matlock is a big believer in the shares of giant German industrial company Siemens ( SI). Southern Europe may be down and out, yet Germany, led by Siemens, continues to be an export powerhouse especially with the weak euro as a tailwind, says Matlock.

Another European company Matlock is particularly high on is Swiss drugmaker Novartis ( NVS), which she calls cheap and, perhaps more importantly considering the circumstances, "stable."

"A lot of investors have not liked the pharmaceuticals in recent years because of the concern about patents coming off, but Novartis has a lot of other operations that will serve them well," says Matlock. "They've bought Alcon, they have Sandoz, a big generic-drug operation, and they also have consumer products which will smooth out its results."

-- Written by Gregg Greenberg in New York.

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Before joining, Gregg Greenberg was a writer and segment producer for CNBC's Closing Bell. He previously worked at FleetBoston and Lehman Brothers in their Private Client Services divisions, covering high net-worth individuals and midsize hedge funds. Greenberg attended New York University's School of Business and Economic Reporting. He also has an M.B.A. from Cornell University's Johnson School of Business, and a B.A. in history from Amherst College.

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