Meanwhile a number of factors have pushed REITs upward: Through Nov. 30, 2011, the S&P Retail REIT Index was up 8.7%, compared to 0.8% for the S&P 500. What is most important is yield, especially when bond payouts remain low. By law, REITs have to pay out 90% of their profits to investors. McMillan reports REITs yielded 3.6% at the end of November 2011, compared to 2.1% for the S&P 500.

Consumer finance companies have seen signs of improvement, too. S&P looks for personal consumption to rise 2.3% in 2011 and 2.2% in 2012. What’s more, says McMillan, finance companies have taken steps to protect themselves by increasing loss provisions. The expectation is that charge-offs will drop as well in 2011 and 2012, even with persistent unemployment. Put it all together, and it makes sense that an S&P index of consumer finance companies rose 11.9% from Jan. 1 to Nov. 30 in 2011.

1 SIMON PROPERTY GROUP INC. (SPG) is one of the largest shopping center operators in the U.S. The company owns large malls and outlet centers in or near major markets such as New York, Miami, Atlanta, Houston, and Los Angeles. We think the company will see revenues increase 7.4% in 2011, and another 4.3% in 2012. Mall construction rates have fallen and that keeps supply in check relative to demand from retailers, which in turn pushes rents higher. Simon owns high-quality properties and the REIT’s geographic diversification shields it from weakness in any one regional market. The stock yields 2.8% and we expect Simon’s dividend to be raised. We hold a 12-month price target of $142 for Simon shares.
PRICE AT REC.: $122.97  •  P/E: 41.13

2 CBL & ASSOCIATES Properties Inc.  (CBL) is a REIT that mostly owns malls and shopping centers in the Southeast and Midwest. The company has done well targeting middle-market areas such as St. Louis. We see 2011 revenues climbing 2.4% as occupancy rates remain healthy, as they’ve remained above 90% in 2011. CBL has also seen robust rent increases—8.2% during the past third quarter. The same catalysts behind Simon’s solid results are at work here. CBL’s yield is a sizeable 5.6%. Our 12-month target for the stock is $22 a share.
PRICE AT REC.: $14.73  •  P/E: 61.38

3 AMERICAN EXPRESS CO.(AXP) should report revenue gains this past year and 2012 as well. We anticipate a 9% rise in 2011 and 12% this year. AmEx’s U.S. and overseas card divisions are driving increases and we were encouraged by the company’s international business in the 2011 third quarter—even amid concerns over Europe’s sovereign debt problems. Write-offs in the U.S. card division have fallen to 2.9% in the 2011 third quarter from 5.7% a year before, a sign that credit issues are abating. We currently hold a $58 price target on AmEx shares.
PRICE AT REC.: $48.78  •  P/E: 12.23

Morningstar analyst Daniel Holland says there may be a long-term investment opportunity in the confusion created by such contradictory information. For one, despite the signs of an economic slowdown in Europe and the U.S., many industrials are still reporting strong order growth. A second positive sign: stock buybacks and merger activity in the sector, which have both been on the upswing. “There are definitely indications that when it comes to the best run industrials, current worries are more headlines than fundamental concerns,” says Holland.

It’s clear that the best managed companies in the group took away some important lessons from the 2008 recession. Many have pared down debt and streamlined operations. Industrials also have a trump card to the effects of the European economic troubles by having some of their business in emerging markets where infrastructure spending is helping to boost revenues. “China and Brazil are particularly compelling stories right now,” says Holland. Finally, stock market volatility has brought down some share prices of the best stocks in the group to bargain levels.

“We look for companies with a wide moat, or in other words, barriers, to keep competitors from encroaching on their markets,” says Holland. “That can include expertise, service, or technology. The bottom line is that in a cyclical industry like this, moats make it possible to maintain operating margins and, in turn, profits.” Holland talked to black enterprise about three of his industrial picks.

—James A. Anderson

1 GENERAL ELECTRIC CO. (GE) It’s a company that ranks as one of our best ideas right now. The stock trades at about 11 times our current-year earnings estimate, which is quite cheap compared with other industrial companies and the historical price-to-earnings ratio that GE has carried in the past. The company is placing more focus on equipment for power generation, which positions it well for emerging market growth. Management currently aims for the GE energy business to grow earnings by more than 10% a year. GE Capital, the company’s finance arm, has bounced back from concerns that clouded its outlook during the 2008 economic crisis. We think GE can reach a fair value of $25 a share.
PRICE AT REC.: $16.48  •  P/E: 12.58

2 PARKER HANNIFIN CORP. (PH) is a maker of engineering and manufacturing equipment—motion and control components as they are called. They include automation and flight control systems, hydraulics, filtration systems, and engines, which are used by companies from McDonald’s to Caterpillar. Parker Hannifin is managed well and has a reputation for engineering expertise. Since the 2008 financial crisis, it has focused on controlling costs and expanding operating margins above 10%. The company also trimmed its debt from roughly 30% of capital on average to a current 20%. It has put 60 years’ worth of effort into setting up a global distribution network. We think fair value for the stock is $97.
PRICE AT REC.: $83.74  •  P/E: 12.39

3 UNITED TECHNOLOGIES CORP. (UTX) United Technologies Corp. has a focus in aerospace and construction. You probably know some of its higher-profile products: Otis elevators, Carrier air conditioners, Sikorsky helicopters, or Pratt & Whitney engines. Like other peers, United Technologies has emphasized cost cutting. Management expects to extract $350 million to $400 million of annual cost reductions. We think the company can attain compound annual earnings growth of 10.9% over the next five years and reach a fair value of $94. One tailwind is its 20% exposure to emerging market growth; another is its recent acquisition of Goodrich Corp., a leading supplier of services and systems to the aerospace and defense industry.
PRICE AT REC.: $78.87  •  P/E: 14.80

“The area is a very strong performer over the long term,” says McKissack, whose firm manages approximately $800 million in institutional funds. “The group has underperformed this year, but when you look further out, we feel midcaps will retain their performance advantage and are one of the best places in the market.” The numbers support McKissack’s outlook. Over a 10-year-period ending Aug. 31, the Russell 1000 index of large company shares returned 3.16%. The Russell MidCap index—the types of undervalued shares McKissack selects for his portfolios—were up 7.16%.

McKissack doesn’t foresee a double-dip recession but he does expect “more stresses and pressures” from Europe and a weak U.S. job market. As such, the volatile stock market will continue to bounce up and down. “General sentiment is worse than what we see for the economy, and as a result, we think there are attractive opportunities,” he says. “It’s a good time for investors to add selectively to their positions rather than to switch money to fixed income or cash, which yield practically nothing right now.”

On top of that, dividend payers are particularly valuable in a shaky economy (see “How You Can Profit from Market Volatility,” this issue). That’s because they require a hefty commitment on the part of corporate management. Think of it this way: A company has to be pretty confident about its business in order to share a slice of its profits with shareholders. Dividend payers tend to be large, blue-chip companies with a proven track record of results. It’s that sort of dependability that helps to steady the performance of dividend-paying stocks in turbulent markets.

Then there’s the fact that interest rates on Treasury bonds have been quite low. Abercrombie says dependable companies that pay an above-average yield (the ratio of a company’s annual dividend payout to its stock price) are an attractive substitute.
A Texas native, Abercrombie works in the investment firm’s Dallas office, where he manages money for high-net worth clients. Named a top financial all-star by Black Enterprise in 2010, Abercrombie talked to BE about three of his stock picks.

1) Johnson & Johnson (JNJ) is one of just four companies that carry a AAA grade on its debt. The company offers a 3.6% yield and has been very reliable—it’s made steady payments since 1944 and has increased its dividend annually for the last 49 years. I think the company can accelerate its earnings growth over the next few years thanks to breakthroughs from its biopharmaceutical businesses. The company’s pipeline includes potential new treatments for Alzheimer’s disease, prostate cancer, hepatitis C, and a stroke prevention medicine. In our view, shares do not fully reflect the value of J&J’s pipeline potential, and as a result we believe shares are attractively valued. Meanwhile, J&J should be affected less and less by major patent expirations on earlier products.
STOCK PRICE: $64.36   •   DIVIDEND YIELD: 3.6%

(Continued on Next Page)

2) AT&T (T) pays a 5.8% dividend. The telecommunications giant has made payouts since 1984 and has increased dividends steadily over the last 26 years. If completed, AT&T’s merger with T-Mobile USA will make it the No. 1 wireless operator in the U.S. (At press time, the U.S. Justice Department filed an antitrust lawsuit to block the proposed acquisition.) The union should bring about operating savings that will fully offset the purchase price. Over the past five years, AT&T has grown its dividend about 5% per year on average. We expect a 2% growth rate in the next five years. We expect revenue growth in a stabilizing economy thanks to AT&T’s wireless and television businesses.
STOCK PRICE: $28.79   •   DIVIDEND YIELD: 5.8%

3) Kinder Morgan Energy Partners (KMP) which operates oil and gas pipelines and storage facilities, pays a 6.6% dividend yield. Kinder Morgan has some 28,000 miles of pipelines used to transport natural gas and refined oil. The company has paid a dividend since 1992 and has increased its payout to investors the last 14 years running. We think Kinder Morgan can generate low double-digit income earnings growth this year, reflecting acquisitions and increased demand for storage capacity. For the past decade this dividend stock has delivered annualized total returns of 19.5%. What’s more: A $10,000 investment in Kinder Morgan 20 years ago would be worth $190,000 today. In the next year, the company plans to build up its energy transportation and storage assets—one reason we think it is insulated from any decrease in oil or gas prices.
Stock Price: $70.56   •   DIVIDEND YIELD: 6.6%

A consultant to retail, financial services, and investment management firms, McKenzie M. Slaughter says she launched her New York-based research, education, and consulting firm Beyond Capital Markets (www.beyondcapitalmarkets.com) last September to help private investors, hedge and pension fund managers, and other institutional clients examine asset classes that are off the beaten path. Along with her five colleagues, she scouts and analyzes opportunities in liquid alternatives, real estate, private equity emerging markets, and traditional alternatives.

Slaughter says individual investors can also get in on the act through exchange-traded funds, or ETFs, baskets of holdings in a wide variety of assets that trade like stocks. She likes ETFs as a cost-effective way to expose portfolios to alternative asset classes. An ETF investment can spread money across a variety of holdings and track an index of stocks, bonds, currencies, or commodities. Slaughter prefers diversified ETFs since single-sector, concentrated holdings are “more prone to market swings” and are higher risk investments. She also likes low expense ratios—typically 1% or lower—for the best-managed ETFs.

To the average investor, Slaughter points out, ETFs are a relatively new investment. She recommends several resources where investors can research them, including Fidelity’s ETF screener (http://screener.fidelity.com/ftgw/etf/evaluator/goto/landing), ETFTrends.com, and Morningstar.

1 SPDR S&P Emerging Markets Dividend ETF (EDIV) The growth of emerging market economies in countries such as China, Brazil, India, Russia, and South Africa offers investors a potential high-return opportunity. As such, the SPDR S&P Emerging Markets Dividend ETF tracks the performance of the S&P Emerging Markets Dividend Opportunities Index as closely as possible and is spread across several global regions including Asia, where 50% of the portfolio is invested; Latin America, with a 25% slice; Europe, with 12%, and Africa, with 9%. The ETF offers investors a way to capitalize on low Treasury yields, and generally invests in the 100 highest yield emerging market stocks that make up the Index and that represent industries such as utilities, telecommunications, financials, industrials, and healthcare. It is not limited to those funds, however. At press time, the largest holdings included Eletropaulo Metropolitana Eletricidade de Sao Paulo (3.04%), and Korea Exchange Bank (3.03%). The SPDR ETF has returned just over 10% since its inception in February while keeping expenses to a modest 0.59%.
PRICE AT REC.: $54.50  •  P/E: 11

(Continued on next page)

2 GreenHaven Continuous Commodity Index Fund (GCC) Commodity markets are another intriguing possibility. While demand for food and energy is steadily rising in both developed and developing economies, supply is stalling. That’s pushing commodity prices upward. Single commodity ETFs—those that track just agricultural goods, natural resources, precious metals, or industrial metals—have recently experienced a major swing in performance; diversified commodity ETFs, however, have been less volatile. Investing in a broad basket of agriculture, gas, precious metals, and other natural resources is also a great way to hedge against inflation. GreenHaven Continuous Commodity Index Fund tracks an index of 17 commodity products in five sectors with 24% of holdings in metals, 18% energy, 18% grains, 12% livestock, and 29% soft commodities (cotton, sugar, etc.).

This ETF focuses on futures contracts, which can rise faster in value than inflation and in turn can help investors protect portfolios against higher prices. The fund spreads its money evenly among all 17 commodities and rebalances daily, a move that limits its volatility. The one-year average for the GreenHaven ETF is 40.47% while the expense ratio is 0.85%.
PRICE AT REC.: $34.66  •  P/E: N/A

3 Vanguard Small-Cap ETF (VB) Small company stocks offer investors high growth but with volatility. An ETF that provides diversified exposure to the group is the Vanguard Small-Cap ETF. Its expense ratio is very low—0.12%—and the ETF seeks to track the performance of the MSCI US Small Cap 1750 Index. The ETF’s portfolio, with more than 1,700 holdings, is spread among a variety of industries—financials and information technology are its biggest weightings—providing diversification that protects investors from a downturn in any one segment of the economy. The Vanguard ETF has reported an average annual return of 7.46% over the last three years.
PRICE AT REC.: $71.56  •  P/E: 18

Brown is a senior financial adviser at the New York firm Altfest Personal Wealth Management, where she has worked for almost 10 years, and she holds a certified financial planner’s license. Brown’s specialty is retirement planning, a job that relies heavily on her fund picking skills.

“At Altfest, we take a value investor’s philosophy—we generally gravitate to undervalued parts of the market,” Brown explains. “Right now, we’re leaning toward investments in large-cap companies. By some reports, the small-cap segment of the stock market is overvalued by as much as 20%. Mind you, we don’t focus on any one portion of the market. That said, we see value in the near term in large company shares.” Brown talked to Black Enterprise about three promising mutual fund investments.

Yacktman Focused Fund (YAFFX)  is a large-cap value portfolio. The manager, Donald A. Yacktman, has been in charge of the fund’s parent since 1992. His track record is impressive: The fund ranks in the top 1% of its group over the last three, five, and 10 years. We like the fact that the fund limits downside in bear markets yet can hold its own during bullish periods. In 2008, for instance, Yacktman was down 23% while the market fell 37%. In 2009, the fund had a total return of 62.7% to the market’s 26.5%. The manager runs a small, concentrated portfolio of around 50 stocks and he sticks with his picks: Its portfolio turnover is under 10% a year. Yacktman tends to gravitate to the big names, too, such as Procter & Gamble and PepsiCo. It takes $2,500 for an initial investment in the fund although that amount is lowered to $500 for IRAs.
1-YEAR RETURN:     18.40%
5-YEAR RETURN:      11.89%
10-YEAR RETURN:     12.99%
MINIMUM INITIAL INVESTMENT:      $2,500
EXPENSE RATIO:    1.25%

(Continued on next page)

FPA Crescent Fund (FPACX) is also a value-oriented portfolio, although it gathers up a wide variety of investments—large- and small-cap stocks, foreign company shares, and bonds. Its manager, Steven Romick, has done a fantastic job as well: The fund ranks in the top 11%, 4%, and 1% according to Morningstar stats for the last three, five, and 10 years, respectively. The manager is a fan of large caps right now, with Aon, Walmart, and Microsoft in the portfolio. At the same time, he has a lot of leeway and can hold cash—which is now just under 20% of the portfolio—until the right opportunities come along. Turnover is relatively low at 32%, as are expenses at 1.17%. The fund’s required initial investment is $1,500 or $100 as part of an IRA.
1-YEAR RETURN:      15.80%
5-YEAR RETURN:      6.47%
10-YEAR RETURN:     9.51%
MINIMUM INITIAL INVESTMENT:      $1,500
EXPENSE RATIO:     1.13%

T. Rowe Price New Asia (PRASX)  is a good way to gain exposure to the rapid developments in the two emerging markets where almost 60% of the portfolio is invested. Manager Anh Lu took over in 2009, but worked with the previous manager before assuming the top spot. Asia is growing quickly, but we’ve seen instances when the fund is down as a good point to jump in. Take 2008 and 2009, for example. The fund fell 61% during the near collapse of global financial markets, but came back with a 103% gain the next year. The fund is a relatively active trader with a 49% turnover, but it keeps expenses low at 1%. The T. Rowe Price fund requires a first investment of $2,500 or $1,000 for IRAs. Finally, we like the long-term scenario for Asia’s growing economies—China and India.
1-YEAR RETURN:     19.27%
5-YEAR RETURN:      17.06%
10-YEAR RETURN:     17.11%
MINIMUM INITIAL INVESTMENT:      $2,500
EXPENSE RATIO:    0.96%

Between the year 2000 to April 2011, inflation has been modest—hovering mostly around a 1.5%  to 3.6% rate of annual price increases as measured by the U.S. Bureau of Labor Statistics. Even though there was a 5.6% spike in July of 2008, negative rates or mild deflation were recorded for several months in 2009. Even so, the cumulative rate of inflation for the entire period from January 2000 to April 2011 would be 33.2%. In real terms, $3,000 in household expenses at the beginning of the millennium would now cost you nearly $4,000 to cover.

Valerie Andrews, 51, had to consider that shift two years ago when she decided to step down from her accounts receivable position at an industrial supply company in Atlanta, Georgia. Andrews had salted away a sizable amount in her retirement savings around the time her firm offered a severance package. She consulted a financial planner, Fred O’Neal, and figured she could amass $500,000 in total with the money her company was presenting to early retirees. Andrews saw it as an opportunity to expand the personal printing company she operated out of her home, Val’s Valuables, and to travel to see relatives across the country. “I’ve wanted to pursue personalized printing for years,” says Andrews. “I worked at printing companies part time to learn as much as I could and now I can do a lot of things: marketing fliers, business cards, invitations, graduation mementos, and wedding pictures.”

The key, says O’Neal, who works for the brokerage firm Edward Jones, was to give Andrews’ savings enough kick to keep up with price increases. His answer: Allocate 60% of Andrews’ portfolio in equity mutual funds than can help her benefit from the stock market’s track record of outpacing inflation over time.

(Continued on next page)

Consider these strategies to help inflation-proof your investments:
Engage in portfolio allocation. Morningstar’s Director of Personal Finance Christine Benz says it’s important to analyze the mix of stocks (or equity mutual funds), bonds (or fixed-income mutual funds), and cash among your holdings. “You have to make sure you have a position in stocks to outpace inflation—even in retirement,” she points out. The old rule of thumb is to subtract your age from 100 in order to find a suitable percentage of stocks or equity funds for your retirement savings. “That’s not a bad starting point but as key as age is, it isn’t the sole determinant. You have to factor in your tolerance for risk and your own personal needs as well,” adds Benz.

Invest in fixed-income investments that keep up with inflation. Bonds typically pay investors a set rate of interest. For that reason, fixed-income investments can be particularly vulnerable to inflation over time. Low-risk Treasury Inflation-Protected Securities or TIPS and I-bonds’ returns, however, are linked to the inflation rate to ensure a real return on your investment. Benz maintains your TIPS holdings should depend on the size of your portfolio. “It’s possible that someone in retirement might hold 20% to 30% of his or her bond portfolio in TIPS with the explicit goal of protecting against inflation—further out from retirement would probably require a lower percentage.”

Include commodities and real estate as part of your asset mix. Like stocks, commodities and commercial real estate have proven track records to keep up with inflation. Raw materials and natural resources—corn, oil, and gold—tend to rise in price when inflation heats up. In the case of real estate, landlords are able to adjust rents for offices and commercial space when prices are on the rise. One caveat: individual commodities and real estate prices can be very volatile. The best strategy is to add a bit—5% to 10%—to your portfolio through diversified ETFs or mutual funds that hold a varied portfolio spread among many holdings.

Eugene Profit, CEO of Silver Spring, Maryland-based money management firm Profit Investment Management L.L.C.  (No. 15 on the be asset managers list with $2 billion in assets under management), says small-cap stocks have benefited from several important trends. A round of government stimulus in the form of the Federal Reserve’s bond buybacks late last year helped. At the same time, small companies have also worked hard to cut costs and run leaner. And while Profit says small caps’ outpacing of the market may slow in the months ahead (as large-cap shares heat up), the right stocks in sectors such as technology and healthcare still have potential to make big gains. At the end of 2010, Profit’s firm launched the Profit Opportunity Fund (PROFX), a small-cap portfolio—a version of a product they have offered institutional investors for more than 10 years.

Profit, a former Yale University and NFL football player, founded Profit Investment Management in 1996 with $100,000. The firm now has grown to one of the nation’s largest asset managers. In June, Profit received the prestigious Reginald F. Lewis Award for his trailblazing success in the world of finance. He spoke to black enterprise about three of his top picks in the small-cap arena.

EUGENE’S PICKS
NuVasive Inc.  (NUVA) is a $1.3 billion company that makes special devices used in spinal surgery. What’s to like about healthcare? The group has put out strong earnings. NuVasive has developed an innovative “spinal fusion” procedure that is less invasive than traditional surgical methods and less invasive—both plusses for elderly patients. There are signs that the company is growing market share and its return on equity is a healthy 15%. We project a long-term earnings growth rate of 22% annually. We hold a $34 price target on the stock over the next 12 to 18 months.
PRICE: $34  •  P/E: 18.81

OmniVision Technologies Inc. (OVTI) makes image chips for digital cameras, tablet computers, and mobile phones like Apple’s iPhone. The company is well run and has widened profit margins. Long-term, over the next five years, we think OmniVision can grow earnings at a 20% average annual rate. Still, the stock is trading at a rather modest 1.1 times its growth rate, in part because of competition worries. We think OmniVision’s position is strong enough to fend off concerns, and we have a 12- to 18-month price target of $38 on the company’s shares.
PRICE: $35  •  P/E: 16.79

G-III Apparel Group (GIII) is a clothing manufacturer that designs and sells sportswear, outerwear and women’s clothing for its own labels, private retail brands, and labels such as Calvin Klein. The company also operates the Wilsons Leather chain. The company is small—it has a stock market capitalization of $850 million. Its shares are relatively undervalued as well. Return on equity, however, is a strong 21% and we foresee a long-term growth rate of 18% for the stock. Consumer discretionary stocks such as G-III will get a boost from the upturn in the economy. We target the stock to rise to $54 a share in the next 12 to 18 months.
PRICE: $43  •  P/E: 15.10

Stewart, a longtime financial sector watcher, has a preference for smaller stocks in the group. The reason: He feels Wall Street and big institutional money managers devote the majority of their time and attention to the largest players. The smaller banks, for their part, are often more conservative, better-run, and undervalued so there’s an opportunity to unearth an underappreciated investment. It’s a tactic that he’s honed while heading RASARA Strategies Inc., his White Plains, New York, money management firm, since 1997. Before that he was a bank analyst for Salomon Brothers and a joint owner of the financial research firm WRM Equity Management Inc. black enterprise talked to Stewart about his top three choices among banking stocks.

New York Community Bancorp (NYB) is a bank holding company that operates more than 240 branches in New York, New Jersey, Ohio, Florida, and Arizona. It also holds a commercial bank that operates in the New York metropolitan area. The $7.5 billion market cap bank has run a solid ship during the financial crisis and after. Stewart notes that NYB managed to maintain its dividend throughout the entire crisis, when many banks were cutting theirs altogether. “They’re considered one of the darlings of income-based mutual funds because of their solid yield,” Stewart points out. He says NYB is compelling not only for a generous 6% yield, but also for the solid credit quality of its loan portfolio—factors he feels could push the stock to about $20 a share in the next 12 to 18 months.

U.S. Bancorp (USB) is a Minneapolis-based national financial institution that engages variously in credit card services, merchant and ATM processing, mortgage banking, insurance, brokerage, and leasing throughout the U.S. The company has a $50 billion market capitalization. Stewart likes the bank’s recent decision to pay a 50 cent per share dividend and its plans for a 50 million share buyback. These tailwinds could push a 15% appreciation in USB’s mid-$20s stock price over the next 12 to 18 months. He says USB may also be on the lookout for acquisitions in the near future; rumors have circulated that the bank might be eyeing Royal Bank of Canada’s operations in the Southeast, for example.

Intervest Bancshares (IBCA), the New York City-based commercial and consumer banking service corporation, is a somewhat more speculative play—but one with a large potential upside. The money manager says an $8.80 book value per share is a far cry from the bank’s stock price. That’s reason enough for a potential climb to $4 to $5 a share in the next 12 to 18 months. Intervest did take a hit in 2009, when the small firm with $2.4 billion in assets and a $52 million market cap saw loan problems slash away at its pre-crisis $26 book value. If IBCA makes it through the 2011 first quarter with no surprises from its real estate and consumer lending businesses, the stock should be on its way to $4 over the next 12 to 18 months.

Like his idol, Warren Buffett, Riddix is a value investor. “I think once investors hop on the growth bandwagon with stocks like Apple, they’re automatically paying more for a company’s popularity,” he says. “The problem is, management has to hit earnings projections perfectly or else you might have problems.” Riddix says value stocks are cheaper and have the potential to surprise you.

For Riddix, mutual fund investing starts with research released by Morningstar, the Chicago company that tracks fund portfolios. A low Morningstar rating does hurt, says the adviser, but five stars don’t necessarily make a fund a definite pick. He looks for a track record that beats the competition; he’s also partial to experienced managers at the helm of the funds he picks. Finally, he likes to see long-term track records and a clear sense of direction.

As for Riddix’s financial market outlook for the next 12 months, he is fairly bullish. He says the stock market’s March pullback was to be expected after share prices enjoyed a two-year climb. “There are opportunities out there in financials and energy companies in this environment,” he says.

Riddix talked to Black Enterprise about three funds he’s recommending to clients.

1. T. Rowe Price Capital Appreciation (PRWCX)
This fund is a balanced portfolio with 66% of its assets in stocks, a 13.77% cash holding, and an 11% stake in bonds. Riddix says the fund’s manager, David Giroux, leans toward value stocks. The fund has done well over time, too. Its average annual 8.74% total return for the past decade ranks No. 1 in its Morningstar category. Time Warner, Pfizer and U.S. Bancorp are among the fund’s top holdings.

2. Fairholme (FAIRX)
Riddix is a big fan of this fund and its manager, Bruce Berkowitz. The fund focuses on long-term growth of capital, and carries a five-star rating from Morningstar. Fairholme has led its category in three-year, five-year, and 10-year performance. Its average annual total return of 11.46% over the past decade ranks in the top 1% of its group. AIG, Goldman Sachs, and Bank of America are some of the fund’s top holdings. The fund likes to snatch up large-, mid-, and small-cap stocks to get an edge on the competition and can be flexible with $19 billion under management. “When funds get too large—with, say, $100 billion to look after—they can’t take advantage of smaller company shares as easily,” Riddix points out.

3. Loomis Sayles Investment Grade Bond A (LIGRX)
This fund invests in highly rated corporate bonds. Riddix likes Loomis Sayles’s reputation as one of the most reputable bond investment houses. The 10-year average annual total return of 8.5% is 3.3 percentage points above its competitors’ returns. The Loomis portfolio is invested in intermediate bonds, which Riddix says could help absorb any bumps if interest rates rise. The Loomis fund’s current 4.59% yield is something of a portfolio boost at a time when savings accounts and CDs pay investors less than half that amount in interest. To top it all off, Dan Fuss, who has managed the fund since 1996, is viewed as one of the best around, according to Morningstar.