Brown Spots Buys

Terry Flanagan

Long, buy-and-hold investors defend their strategies in the year of volatility.

While cynics say year 2011 hasn’t been kind to long-only, buy and hold shops, firms that embody the classic strategy stick to their long-term oriented view, now more than ever.

For some traditional buy side firms, value investing and the answer to higher yields are not necessarily holding onto name-brand companies.

“We have sorted through our options and are employing three strategies in client portfolios in an effort to boost portfolio yield: equity-income strategies; income-producing real estate; and emerging-market debt,” said Paul Chew, head of investments at Baltimore-based Brown Advisory.

The mutual fund company has roughly 26 million under management.

One of the most commonly employed income strategies involve investing in companies with high paying dividends, which has become a growing trend during the current era of strong fundamentals.

Chew is quick to point out a number of misnomers about what strong fundamentals means for one’s investment outlook.

“The best long-term predictor of stock prices is corporate profits. Stock prices today suggest that earnings aren’t sustainable—so companies that can keep ratcheting up profits should be rewarded,” he said—dispelling the notion that favorable earnings spell for a happy long-term portfolio.

“Probably the most impressive development in the last couple years has been the dramatic growth in U.S. corporate profits. In 2011, S&P 500 earnings have risen a remarkable 15% while GDP has expanded just 1.4% annualized,” said Chew, signaling that “corporations have generally delivered exceptional numbers by squeezing every dollar of profit they can out of sluggish sales through tight cost controls.”

However, there are traps when it comes to income investing. “Income-trap stocks may be in danger of severe price depreciation. Equity-income investors face both income risk, such as the risk of a dividend cut, and principal risk via a fall in stock price, according to Taylor Graff, senior analyst in Brown’s Asset Allocation group.

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