How top money managers are playing rising rates

Published Thu, Sep 17 201510:40 AM EDTUpdated Tue, Sep 22 20154:57 PM EDT

Ahead of one the most anticipated Federal Reserve interest rate decisions in memory, CNBC Pro reached out to the leading investors who are part of Squawk Box's Platinum Portfolio competition to find out where they are putting money to work. The central bank is expected to announce Thursday afternoon whether it will raise interest rates for the first time since June 2006. Although investors and economists alike remain split about the timing of a potential rate hike, the consensus sentiment points to short-term rates eventually going up. Here is how the "smart money" has positioned itself for the months ahead: "The Fed is led by 'doves' and they do not want to strengthen the U.S. dollar further with a rate hike, since it would cause commodity prices to fall further and increase the risk of deflation. All economists are trained to avoid deflation at all costs. In the end, the Fed will follow market rates higher, but I do not expect that to happen until December in a 'one and done' rate hike." Navellier is using the plunge in commodity prices to focus on companies that benefit from lower input costs, such as airlines on the back of lower oil prices. He also remains concentrated in sectors such as health care, biotech, retailers and technology (data security, Apple and its suppliers), as these industries continue to experience robust revenue growth, according to his analysis. Some of his top picks include Allergan (AGN), Gilead Sciences (GILD) and CVS Health (CVS)—each up at least 6 percent this year. "Historically, equities have performed well after the first rate hike, especially if the Fed is 'one and done' for a while (our assumption is that they will increase once this year and then wait until 2016 before their next move). Therefore, we are optimistic that the stock market will continue to recover post the August downdraft. Bear markets are usually brought about by recessions, overvalued markets, or a credit crisis. We are seeing none of these risks at the present time." Malik is using the volatility in the past month to shop for "high quality growth stocks" in areas such as large-cap software and biotech. She also believes that cyclical names, those closer tied to economic growth, may do well as the economy accelerates. On the contrary, she is avoiding REITs and utilities, as both groups tend to underperform in a rising rate environment. Some of her top picks include Alexion Pharmaceuticals (ALXN), Aramark (ARMK) and Diamondback Energy (FANG). "I have been in this business for almost 50 years. My entire career I have spent as a fundamental investor at a hedge fund, back when this was really just a cottage industry. Throughout that period the 'effective' Fed funds rates has gone from a low single-digit percentage in the 1960s to almost 20 percent in the early 80s to 0 percent today. The markets have gone up and down, but mostly up. The real economy has grown tremendously. It's important to keep this perspective when you hear people in a frenzy over a 25 basis point move in interest rates." Schafer believes that well-managed companies with strong businesses will do well over time, regardless of the direction of interest rates. "So if you are worried that a 25- or 50- or 100-basis-point move in interest rates will impair the value of one of your businesses, that is probably not a business you want to own," said Schafer. His top picks include Interxion (INXN), ANI Pharmaceuticals (ANIP) and Cogent Communications (CCOI). "Likely the best course of action is raising rates Thursday, and then making it clear that based on current data, this should be it for a while." Katz believes that if the Fed does increase rates, financial stocks will get a "nice tailwind." He predicts that a higher rate environment could be a "multi-quarter" catalyst for the group based on valuations and fundamentals. Apart from the Fed, he thinks industrials and energy companies are poised to end the year on a positive note, as well as within the next 12 months. His top picks include Schlumberger (SLB), Johnson Controls (JCI) and Qualcomm (QCOM). "The Fed should leave rates unchanged at this meeting and also give dovish guidance for only gradual tightening, suggesting a liftoff will likely take place in December or early 2016. There's no need to raise rates now with both wage and price inflation below expectations, especially with a slowdown in global growth, turmoil in emerging markets, the intense August equity-selloff and wider credit spreads." Sass believes investors should focus on companies with superior growth that will be able to weather the slowdown in global economic growth. Here are the areas he likes right now: Health-care stocks like Allergan (AGN), Mylan (MYL), McKesson (MCK) and Shire (SHPG) are "undervalued health care plays with double-digit organic growth plus potential accretive acquisitions." Whirlpool (WHR) is a "play on housing and appliance replacement cycle," while another housing play Realogy (RLGY) is the "ideal play on rising existing homes sales and prices." CNBC Pro subscribers can access more investment ideas from all the "Squawk Box" Platinum Portfolio contributors by clicking here .

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Lucas Jackson | Reuters

The central bank is expected to announce Thursday afternoon whether it will raise interest rates for the first time since June 2006.

Although investors and economists alike remain split about the timing of a potential rate hike, the consensus sentiment points to short-term rates eventually going up.

Here is how the "smart money" has positioned itself for the months ahead: