U.S. stocks are down sharply from the record highs they reached in late February as companies ranging from Apple Inc to Tesla Inc warn investors their supply chains and revenues could be derailed by the rapidly spreading virus known as COVID-19.
As a result, fund managers from firms including Wells Fargo, GMO, Madison Investors and Needham & Company say they are looking at companies in the healthcare, technology and financial services sectors which could continue to gain market share regardless of any economic disruptions from the outbreak.
"We felt that we were due for a correction, we just didn't know what would trigger it, and when it would begin," said Chris Retzler, portfolio manager of the Needham Small Cap Growth fund.
"I don't know how low we go and how long we stay there, but I still remain firmly of the belief that we are in a bull market," said Retzler, adding that he was actively adding to companies during the market sell-off.
Retzler is focusing his portfolio on companies that can benefit from the growth of 5G communications, military modernization and data security, among other areas.
He also remains bullish on healthcare companies, which saw share prices decline earlier this year on concerns that Bernie Sanders, a self-avowed democratic socialist senator from Vermont, could win the Democratic presidential nomination and push a Medicare for All plan.
"We have healthcare investments where we think that names are misunderstood, and we think the opportunities are great but are taking a little bit longer to excite investors," Retzler said.
Mike Smith, portfolio manager of the Wells Fargo Endeavor Select fund, said he reserves a portion of his portfolio to focus on companies with compelling valuations and has been more active in the last week about adding to healthcare and technology names.
Among the more recent additions to his portfolio is DexCom Inc, a medical device company that makes continuous monitoring devices for patients with diabetes. Shares of the company are up nearly 32% for the year to date through March 5, while the broad S&P 500 is down slightly more than 5% over the same time.
"We're trying to find those companies that are impervious to what's going on right now," Smith said.
Matt Hayner, portfolio manager of the Madison Investors fund, began buying shares of Becton Dickinson and Co, a maker of medical supplies and devices, in January. The company, whose shares have dropped about 11% year to date, now represents about 4% of Hayner's portfolio.
"Even in the face of economic disruption, people will still need healthcare and maybe even more so with a disease traversing the globe that ultimately hospitalizes people," he said.
NEW 'QUALITY' STOCKS
The annual Lipper Fund Awards granted by Refinitiv, formerly the financial and risk business of Thomson Reuters, recognize the top funds and fund management firms in more than 20 countries based on risk-adjusted returns. Winners were announced on March 5 in New York.
The market risks from the coronavirus outbreak should "burn themselves out" within the next two quarters, setting up a rebound in the shares of companies that have seen sharp declines, said Tom Hancock, portfolio manager of the GMO Quality fund.
Hancock added a new position in a healthcare company to his portfolio last week and built up a new position in ride-hailing firm Lyft Inc over the last two quarters after the company's "broken" initial public offering left its shares trading at an attractive valuation, he said.
Hancock is now focused on companies that can grow regardless of the economic impact of the coronavirus, he said.
"We still have concerns that are stopping us from going out and buying absolutely everything," Hancock said.
He said he was focusing on giant technology companies like Google-parent Alphabet Inc and Apple Inc which have what he called "natural monopolies." Shares of both companies are down about 5% over the last month.
"If you say high quality stocks, people think of names like Procter and Gamble and Pfizer," Hancock said. "But we think the new quality stocks are the technology stocks that have very low capital requirements and operate winner-take-all business models."
By David Randall