6 Top Mutual Fund Managers See Hard Times Ahead

The overarching message at Morningstar’s annual investment conference was downbeat and sobering. Big-picture investors in particular foresee sluggish growth (at best) in the debt-burdened U.S., European and Japanese economies. Some bottom-up stock pickers say they’re finding good values, but these tend to be in high-quality, defensive names.

Jeffrey Gundlach, co-manager of DoubleLine Total Return Bond Fund (symbol DLTNX), thinks the game is up for Americans after three decades of rapid debt accumulation. The problem is that they must repay those debts in a low-growth economy. Gundlach, the keynote speaker at the conference, which was held in Chicago from June 23 through June 25, anticipates high volatility in stock and other markets because of the “cumulative effects of a monstrous creation of credit.” He advises investors to focus on preservation of capital in a deflationary and volatile environment.

Rudolph-Riad Younes, co-manager of Artio International Equity II (symbol JETAX), frets that the U.S. and some other Western governments may already be stuck in a debt trap. “The U.S. government destroyed its balance sheet to save the banks’ balance sheets,” he says. “Government debt around the world is rising exponentially.” The challenge for industrialized nations, he says, is to make the transition from debt trap to self-sustaining growth.

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Charles de Vaulx, co-manager of IVA Worldwide Fund (IVWAX), was not alone in expecting the U.S. economy to start weakening in the second half of this year. He calls the recovery an “optical illusion” based on government spending and large inventory adjustments, and he notes that small-business formation and job creation in small businesses are miniscule. De Vaulx sees a “mediocre economic outlook in the U.S. and worse in Europe” and expects U.S. stocks to return only 4% to 7% annualized over the next five to seven years.

But even bearish fund managers such as Steve Romick, of FPA Crescent (FPACX), are spotting value in this market. Romick says he’s gravitating toward large, global businesses with rock-solid balance sheets. For instance, he likes the stock of Wal-Mart Stores (WMT), which he says is akin to an annuity with a rising stream of distributions. (More quality ideas: 7 Stocks for the Next 7 Years.)

Dividend-growth mavens such as Hersh Cohen, chief investment officer of ClearBridge Advisors, a unit of Legg Mason, think that this is an excellent time to invest in high-quality companies that regularly boost their dividends. Cohen notes that blue-chip stocks such as Johnson & Johnson (JNJ), Abbott Laboratories (ABT), Kimberly-Clark (KMB) and HJ Heinz (HNZ) yield more than ten-year Treasury notes and have the strength to boost those dividend streams even in a slow economy. (See our finds on The Hunt for Dividends .)

Michael Keller, co-manager of BBH Core Select (BBTEX), is also hunting for companies with the stamina to grow in a dour economy. He likes global firms such as Coca-Cola (KO), Nestlé (NSRGY.PK) and PepsiCo (PEP) for their superior brands and worldwide distribution strength. BBH recently added Johnson & Johnson to the portfolio.