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David Corris: Market volatility has been rising lately due to concerns about global economic growth and uncertain Fed policy. This has led investors to seek higher quality, stable companies, which directly benefits the defensively-oriented BMO Low Volatility Equity Fund and also benefits the BMO Large Cap Growth Fund, which focuses on high quality, sustainably growing companies. A second key theme in the market has been the strength of the US dollar, which along with falling oil prices, has been a tailwind for the US consumer. Both funds have benefitted from domestically-focused consumer companies, such as Kroger (KR) in the BMO Low Volatility Equity Fund and CVS Health Corporation (CVS) in the BMO Large Cap Growth Fund.
MutualFunds.com: Large-cap names have been driving much of the steady gains and both funds are loaded with companies like Apple (AAPL), Microsoft (MSFT), and others. Do you have any apprehension putting more capital to work in a market where dividend yields for the S&P 500 trade near their historic low end range?
David Corris: No, we do not explicitly target dividend yield and have found historically that much of our return comes from capital appreciation. We believe the US economy will continue growing and that will drive further gains in the US equity market. Moreover, we think some of the traditionally high-yielding areas of the market, such as Utilities, may be getting slightly expensive so we are not particularly focused on yield at the moment.
MutualFunds.com: How does the current bond market environment affect your perspective on how the funds are being managed?
David Corris: Low yields in the bond market reinforce concerns about economic growth and the lack of inflation, and helped fuel last year’s outperformance of defensive and higher-yielding companies. We continue to monitor bond yields as another indicator of expected economic growth and Fed policy.
MutualFunds.com: What events would cause you to start raising cash and become a bit more defensive?
David Corris: We typically stay fully invested in the market and do not use cash management to adjust the risk profile of the Funds. Within our equity positions, we would start becoming more defensive if we saw a material slowdown in US economic growth, if global growth became a more significant headwind for large US multinationals, or if market volatility picked up significantly. In addition, we constantly monitor how risk is being valued across the market, and while it appears to be fairly neutral right now, a significant change in that relationship could lead us to become more defensive.
MutualFunds.com: Do you expect to add more international exposure to either of the funds? Are there any areas internationally you favor more than others?
David Corris: No, both funds are US-focused so we are not planning to add international exposure. However, we do manage the BMO Global Low Volatility Equity Fund (BGLBX) that invests in global developed and emerging markets. In that strategy, we tend to favor Asia over Europe right now. We also favor the more defensive sectors, such as Health Care, Consumer Staples, and Telecom, over more cyclical sectors such as Energy and Materials.
MutualFunds.com: Finally, What are the main themes investors should pay attention to for the rest of 2015?
David Corris: There are a number of themes in the market that are currently playing out that we believe are all interrelated. These themes are rising volatility leading to increased risk-aversion, a stronger dollar, falling oil prices, low interest rates, a lack of inflation, consumer strength, and outperformance of US over global markets. We believe the key question for 2015 is how long these themes will continue, or if and when they start to reverse.
DISCLOSURE: The views and opinions expressed in this article are those of the authors, and do not represent the views of MutualFunds.com. Readers should not consider statements made by the author as formal recommendations and should consult their financial advisor before making any investment decisions.
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