It's tough to be a contrarian in a bull market, but Oak Hall Capital Advisors, New York, is finding interest among plan sponsors preparing for hard times.
To be ready, Oak Hall recently added research staff and introduced a new product to take advantage of sponsors' underweighting in commodities.
With most indicators pointing to an economic slowdown, the firm is seeing renewed interest among large sponsors for contrarian value management, said John C. Hathaway, president.
Many contrarians have fallen by the wayside during the bull market in equities, as sponsors became momentum players, said John J. Hock, executive vice president. But as large pension funds grow larger, they still need to add more equity, and they are looking for alternative equity strategies to complement their core investments, said Mr. Hock.
"For the first time in a few years, we're seeing among the largest plan sponsors an interest in our work," said Mr. Hock. A selling point is the fact that out-of-favor companies tend to perform better than other stocks in a down market, said Mr. Hathaway.
The firm boosted its research capabilities with two senior analysts. Edward M. Cimilluca, formerly director of research at J.&W. Seligman & Co., was named senior vice president in April, joining John W. Morosani, who joined the firm in early 1995 from S.G. Warburg & Co., where he was director of research The type of investing Oak Hall does is very bottom-up and requires extensive research, so the new hires corrected some short staffing at the firm, said Mr. Hathaway.
Earlier this year, Oak Hall introduced a dedicated portfolio of raw material equities investing in companies such as steelmakers and paper producers, with a minimum portfolio size of $5 million for institutions.
Among the areas where Oak Hall is investing are retailing and restaurants, where stock prices are down approximately 30% from last year, said Mr. Cimilluca. While the public expects a recession, falling interest rates could help the economy improve by year end and early cyclicals such as retail stocks could get an early advance boost, he said.
Oak Hall is also very enthusiastic about oil and gas, said Mr. Hathaway. The fundamental case for oil and gas is very strong, despite the low price of oil, he said. He noted world oil consumption is beating most forecasts and, with the continuing growth in developing countries, the rising demand is pushing the limits of production capacity.
At the same time, improving technology for exploration and drilling is helping find and pump oil more effectively and results in high incremental returns for the oil companies, said Mr. Morosani. Investors are starting to see more profitability among oil and gas companies, but there is still no euphoria, because mild weather this past winter resulted in low prices, he said. Additionally, many sponsors are underweighted in oil and gas, which makes it a good sector for prospecting, said Mr. Cimilucca.