Huntington Asset Advisors is betting on the IT and health care sectors. That's where the firm is concentrating 30% of the holdings in its newly launched US Equity Rotation Strategy ETF, an actively managed fund that seeks to beat the S&P Composite 1500 by rotating into sectors expected to show long-term appreciation.
"What we're trying to do is get the performance of the 1500 plus a little bit extra," Paul Koscik, the fund's portfolio manager, said in an interview.
The fund first puts 70% of the assets into the S&P Composite 1500. Then it invests the remaining 30% in the two best sectors of the index. The 30% "that moves" gives the fund "the chance to offer alpha" without taking too much risk, Koscik says.
For now, health care and IT offer the best shot at giving investors that "little extra," according to Huntington's research staff, says Koscik. He compares the two sectors to opposite ends of a barbell. The tech industry is riskier and more aggressive while health care is conservative and less volatile. Together, they "balance each other off," he says.
Koscik notes that neither he nor co-portfolio manager Martina Cheung identify the industry sectors themselves. A team of Huntington investment professionals identifies the sectors and tells them when to rotate the investments.
He and Cheung are on their own, though, when selecting the companies in the chosen sectors. Their top pick? In technology, it's Apple, "one of the best-run companies in the world," Koscik says. Koscik is especially optimistic about Apple's upcoming release of the iPhone5, which he believes will deliver a big boost to earnings in the fourth quarter. He also likes Microsoft, which is cheap and has "decent dividend yield," and E-Bay, whose PayPal business is doing well.
In health care, Koscik is bullish on Pfizer, Abbot Laboratories and Merck & Co., businesses that have good valuations and dividend yields. Koscik noted that since the Supreme Court's decision on President Barack Obama's health care initiative, pharmaceutical stocks have started to "act better" after a long period of weak returns. "They were kind of underperforming for quite a while but we're starting to see more outperformance," he says. He also believes drug companies have good growth rates and will have strong demand as people get older.
Koscik is less definitive about the market outlook, describing it as "trendless." While economists forecast a 2.5% growth rate, uncertainty surrounding Europe and the looming "fiscal cliff" in the U.S. make it difficult to get a handle on the market, he says. "We don't want to become too aggressive and we want to be smart and that's why we like this ETF," he says of the US Equity Rotation Strategy. It "benchmarks the whole market" and "still adds a little," he says.
The new fund joins a fledgling industry of about 50 other actively managed ETFs on the market, whose combined assets account for less than 5% of all actively traded products. Koscik believes the number of active ETFs will multiply over the next five to 10 years and possibly be the "next big area of interest" for investors.
"Lots of other people are trying to get into it," Koscik says. "We have a sense that this is a market that is going to come alive."
Huntington Asset Advisors is a subsidiary of Huntington National Bank, which is a subsidiary of Huntington Bancshares Inc., a $56 billion regional bank holding company based in Columbus, Ohio.