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Fund Managers Get Defensive

Volatile financial markets. Lowered earnings guidance. The European debt crisis. It's enough to make investors not only nervous, but confused.

During a recent American Beacon Advisors investment forum in New York, asset managers explained how they are reacting to these challenges and discovering new investment opportunities—both domestic and international.

The volatility over the past few months has left Wyatt Crumpler, Vice President of Asset Management at American Beacon Advisors very cautious. “We think now is a good time to be defensive,” Crumpler said. He believes euro zone sovereign debt concerns have elevated risk in the weeks and months ahead.

As the end of the second quarter approaches, Crumpler said earnings may mimic the first quarter. “In the first quarter, we saw topline revenue and sales lines increasing for the first time at a significant pace. We’re expecting that to increase at about the same level that we saw in the first quarter," he said.

The Dow Jones Industrial Average and the S&P 500 are virtually flat year to date, so money managers are looking for growth in the second half of 2010.

Large cap stocks may benefit from the recent market turmoil, according to Patrick Kaser, Portfolio Manager at Brandywine Global Investment Management. He said the volatility has made valuations for large companies very attractive.

“We see a lot of high quality companies trading at 10 or 11 times earnings, strong balance sheets and attractive dividend yields,” Kaser said. He prefers companies that performed well during the financial crisis, such as Hewlett-Packard and IBM . These companies will benefit from an increase in enterprise IT spending over the next 18 to 24 months, Kaser said.

Within the telecom sector, Kaser said Vodofone should not be ignored. The company has taken a beaten lately, due to a decline in the British pound, but he thinks Vodaphone has upside potential. “Over the next 12 to 18 months Verizon Wireless’ multibillion-dollar dividend payment to Vodafone will be a catalyst to the stock, a 30 percent to 40 percent potential return is achievable.”

Global commercial real estate was also a popular topic at the forum. A recent note from CB Richard Ellis characterized global economies as “improving, but bumpy.” Steve Carroll, Managing Director of Global Real Estate Securities at CB Richard Ellis, echoed the sentiment.

“It is a lot bumpier in the United States and the U.K. than in places like Canada, Asia and Australia where the recovery in the economies are much more advanced.”

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