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- Eric Freedman — who handles $170 billion as the chief investment officer of US Bank Wealth Management — is most positive on parts of the market that have been neglected, or that have extremely long-term trends working in their favor.
- He says focusing on those two themes could help investors steady the ship during and after the latest bout of extreme volatility.
- The critical trends that Freedman is focusing on include US demographics and productivity.
- Unpacked below are the areas of the market that Freedman currently favors.
- Click here for more BI Prime stories.
As investors either flee the market or hunt harder than ever for opportunities, Eric Freedman — who manages $170 billion as the CIO of US Bank Wealth Management — is looking for ways to keep the ship steady.
He isn’t giving up hope for the economic expansion. But with so many parts of the market looking overvalued and threats seeming to rise by the day, he told Business Insider he’s focusing on areas that have either been neglected, or that offer undeniable long-term stories that could last for decades.
Here’s a segmented rundown of his current investment picks:
Mid-cap stocks
In stocks, that starts with a couple of areas investors where investors have shown a clear lack of enthusiasm.
Mid cap stocks have lagged behind their larger rivals all year: The S&P Mid Cap 400 index hasn’t risen as much as the benchmark S&P 500 and has been unable to reach the record highs it reached a year ago.
"We think it’s under-followed, we think it’s under-loved," he said. "It’s really misunderstood amongst a lot of investors."
In his view, they’re the right choice for investors who see rising trade tensions as a threat to large caps and are also worried about the dangers facing small caps, which are less profitable and might lack financial durability in a potential recession.
"You tend to have companies that are well managed, that are gaining more of a global perspective, and have diversified revenue streams," he said. "That’s almost the best of both worlds."
US-based healthcare and growth stocks
His top sector pick — healthcare — has also struggled this year. Companies in the sector are bringing up the rear in the US market, but Freedman says long term trends make them a good bet because the population will continue to age, supporting years of growing demand for health care products and services.
"Areas like biotech, areas like health care services, we think are interesting," he said. "They’ve really underperformed."
He’s also thinking longer-term when he says he remains optimistic about growth stocks, which have crushed their more conservative value peers throughout the bull market.
Read more: GOLDMAN SACHS: These 30 stocks are poised to pop on earnings after a week of brutal trade-war news
"We don’t think that growth is going to surrender and roll over anytime soon," he said. Freedman notes that trends in economic productivity are a big challenge, and businesses will have to spend a lot of money to try to overcome them. He calls that supportive for growth stocks.
"CFOs are going to invest in things that make their companies more efficient and faster, and those tend to be productivity enhancements," he said.
Evaluating stocks regionally, though, Freedman has more of a consensus view. He expects US stocks to maintain their lead over other areas and thinks emerging-market stocks still have downside risk.
Structured credit
In his quest to find yield for clients, he says that structured credit is also an area that’s promising because it’s big index funds overlook it.
"We do think there’s still some value to be found in structured credit without taking on a lot of risk," he said. "they tend to be under owned just because they’re not obviously owned by indexers."
He added that non-agency mortgages from private institutions, not from Fannie Mae, Freddie Mac, or Ginnie Mae, also have an appealing "scarcity value."
While he thinks it’s vital to own fixed income assets, in a lot of other areas Freedman says investors are reaching for yield and taking on too much risk: commercial mortgage backed securities, bank loans, and especially leveraged loans.
"Leveraged loans have been routinely overbought," he says. "While the returns have been fine, we think from here what you’re paying for relative to what you’re going to get is a really low return and a higher risk type of proposition.
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See Also:
- Best-selling author James Rickards explains how ‘parasite’ passive investors will make the next market downturn ‘like a runaway train with no brakes’
- GOLDMAN SACHS: Here are 10 stocks to buy — and 10 to avoid — as Trump’s trade war rages on
- One market bear says portfolios are headed for their worst returns since the Great Depression — and explains why now is the time to flee stocks
Source: Business Insider – mjay@businessinsider.com (Marley Jay)