If August\u2019s stock-market weakness has you concerned, brace yourself because it\u2019s going to get a lot worse.<\/p>\n
That\u2019s the outlook of Eli Salzmann, who manages the Neuberger Berman Large Cap Value Fund NPRTX. While most investors have migrated to the \u201csoft landing\u201d and \u201cno landing\u201d camps, Salzmann holds steadfast to his belief that a recession is on the way.\u00a0<\/p>\n
Why should you care what he thinks? Because where most mutual fund managers have a tough time beating the U.S. market, Salzmann\u2019s $12.6 billion fund outperforms nicely over the past three- and 10 years, according to Morningstar Direct.\u00a0<\/p>\n
Much of that long-term outperformance comes from out-of-consensus forecasts about macro trends \u2014 like the one behind his current cautionary stance.\u00a0<\/p>\n
\u201cThe economy is heading south in the next six to nine months,\u201d he told me in a recent interview. \u201cMake sure your portfolio is very defensive and protects on the downside, because the downside isn\u2019t going to be pretty.\u201d<\/p>\n
If you are looking for defensive names to consider, here\u2019s how Salzmann is positioned for what he expects will play out.\u00a0<\/p>\n
Top holdings include \u201csteady Eddie\u201d consumer staples names including Procter & Gamble Likewise, the fund manager is underweighting cyclical sectors like banks, technology, and consumer discretionary companies in the portfolio. For example, he has 2.6% of his fund in tech vs. 12.5% for large cap value overall, Morningstar reports.\u00a0<\/p>\n This defensive posture has decidedly hurt the fund so far this year \u2014 when the crowd moved into cyclical sectors as worries about recession eased. Salzmann\u2019s fund trails both the Morningstar large-cap value category and Morningstar U.S.\u00a0large-cap value\u00a0index. But he\u2019s not throwing in the towel.\u00a0<\/p>\n \u201cDo we think it is time to cave in and go with everyone else? No. We are staying where we are,\u201d Eli Salzmann says. \u201cThere are times when you want to bet against consensus, and now is one of those times. We think being defensive is absolutely the right move.\u201d<\/p>\n Salzmann\u2019s cautious economic outlook and defensive posture are based on three core concepts that reformed bears largely abandoned this year.\u00a0<\/p>\n 1. Monetary policy takes around 18 months to impact the economy \u2014 and it\u2019s about to hit:\u00a0<\/strong> Since the Federal Reserve raised rates aggressively in the first part of 2022, that means the U.S. central bank\u2019s policy change is only now going to start hitting the economy. \u201cAt some point past September, leading indicators will have tough time,\u201d Salzmann says. Likewise, tighter monetary policy takes about 24 months to hurt company earnings. He adds: \u201cAt some point later this year or next year you will see companies miss earnings in a big way.\u201d\u00a0<\/p>\n The important wrinkle here is that investors consistently forget about this time lag, and shrug off a dramatic monetary policy change. \u201cWhen the economy did not slow in a substantial way towards the end of last year everybody said it\u2019s time to go back in the water. Guess what. The sharks are still there.\u201d<\/p>\n <\/p>\n \n \u201c<\/span> \u2018What happened with the banking sector was simply the appetizer.\u2019\u201d<\/span>\n <\/p>\n
\n PG,
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\n PepsiCo
\n PEP,
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\n Philip Morris International
\n PM,
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\n and beverage and snack giant Mondelez International
\n MDLZ,
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\n The fund also has substantial positions in utilities including Duke Energy
\n DUK,
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\n Sempra
\n SRE,
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\n and Exelon
\n EXC,
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\n and mature healthcare giants Johnson & Johnson
\n JNJ,
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\n Merck
\n MRK,
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\n and Pfizer
\n PFE,
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\n Salzmann recently had 18.8% of the fund\u2019s portfolio in consumer defensive names, compared to 8.6% for large-cap value funds overall, according to Morningstar Direct.\u00a0<\/p>\n
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