Street Wise: Fund manager sees corporations driving rebound

From where Sujatha Avutu sits, there are solid reasons to position her Evergreen Equity Income Fund (ETRAX) to benefit from a shift from consumers to corporations as economic drivers.

The $1.2 billion fund, which she manages for Evergreen Investment Management Co. LLC in Boston, is poised for a turnaround that places more emphasis on corporations and less on the consumers who have carried the recovery this far.

“From a tactical standpoint, I believe we’re on the cusp of an economic recovery, and the fund is positioned for that,” Ms. Avutu says.

The details of her line of thinking are laid out across the 130 stocks making up the portfolio.

For starters, the fund is significantly overweighted in technology and industrials, compared with its benchmark, the Russell 1000 Value Index.

Tech stocks currently represent a 13.5% weighting, compared with the index’s weighting of 6.9%, and industrial companies represent 12.5%, compared with the benchmark’s 7%.

This is not to suggest that big bets are Ms. Avutu’s style. In fact, the contrary is probably more accurate.

While she will go as much as 200% above any sector weighting that makes up less than 10% of the index, she also stays within 30% above or below the index weighting in any sector that is represented by 10% or more of the benchmark.

Year-to-date through last Thursday, the fund had generated a 22.5% return, compared with a 21.8% return by the index.

One of Ms. Avutu’s objectives since taking over the portfolio nearly two years ago has been keeping it in step with its stated objectives. At the time, the fund was “primarily income focused.”

It took her about three months to get the portfolio to where she felt it was honoring its total-return objectives. One step was to pare down the 45% allocation to convertible and agency securities to about 20% of the portfolio.

“This is a fund that’s supposed to be managed for total return,” Ms. Avutu says. “The convertible and agency weightings were great for income, but not when the market is going up.”

In addition to trimming the technology exposure, which was three times the benchmark weighting, she introduced some consumer staples and increased the exposure to energy stocks.

“We needed to stabilize the performance of the fund and take away the sector bets,” she says. “I believe a fund like this should not have higher-beta, lower-quality companies that have no balance sheet support.”

Ms. Avutu, who has a background in covering the banking and insurance industries as an equities analyst, says that looking beyond the balance sheet has long been her modus operandi.

“The financials in the banking and insurance industries can be opaque, which is what gave me the abilities to look through the balance sheets and the cash flow numbers to focus on a company’s management,” she says. “This kind of thing has become in vogue over the last couple of years, but it’s the way I’ve always done it.”

Ms. Avutu’s self-described “value slash contrarian style” has led her to such seemingly hard-luck stocks as SEI Investments Co. (SEIC), an asset manager and investment technology provider out of favor with investors.

The stock, which closed Thursday at $28.40 a share, was up just 1% since the start of the year due to a 21% decline since mid-October after the Oaks, Pa., company announced that it would allocate more resources to growth.

“The stock was driven down because people are looking only at the short-term impact on earnings,” Ms. Avutu says. “Companies go through periods of investing and cycles of harvesting their investments. I’m a long-term investor, and I see the ability to pick up a supersolid cutting-edge company like SEI at these levels as attractive.”

She has a 12-month price target for SEI of $38 a share.

Questions, observations, stock tips? E-mail Jeff Benjamin at [email protected].