Market-Beating Manager Shifts to “High-Quality”

While much of the 2009 rally has been led by junk-type stocks, another top manager is saying that high-quality blue-chips are the place to be going forward.

John Osterweis, whose Osterweis fund has beaten the S&P 500 by fairly wide margins over the past 1, 3, 5, and 10 years, is shifting his portfolio toward “mid-to-large sized companies with low debt levels that are capable of weathering prolonged economic headwinds,” The Motley Fool’s Chris Jones reports.

Osterweis normally focuses on “companies with infirm — but improving — balance sheets that have fallen out of favor with the markets,” Jones says. But now he’s focusing on blue chips because of the economic environment. “While the stock and bond markets have rallied sharply on near term signs of economic stabilization,” Osterweis says, “the fundamental economic backdrop has not changed materially.” So far from going after those companies with “infirm” balance sheets, Osterweis is now targeting companies that could gain market share from organizations that become insolvent or are driven out of the market, Jones notes.

One area Osterweis is high on is health care. He thinks diagnostics companies, pharmaceuticals, and rehab facilities will benefit from reforms that will make health care available to more people, Jones reports.

Overall, however, Osterweis sees a number of issues that could cause problems for stocks. “Instead of moving into a prolonged bull market,” he predicts, “stocks will gyrate up and down, reflecting the starts and stops of an economic recovery.”