Qihoo, Google, Trinity: Top Managers' 2014 Choices


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2014: A Look Back And Ahead

Small-cap growth funds outperformed their investment-style and market-cap category rivals in 2013.

They averaged a 40.31% return through Dec. 30, according to Morningstar Inc.

Small-cap blend funds were second best, averaging 36.96%. Bringing up the rear among the nine categories were large-cap value funds. Their 30.72% gain in 2013 vs. the S&P 500's average annual 11.87% since 1971 shows what a strong year it was for the stock market overall.

But strategists and fund managers expect the market to differ in 2014 in eight ways:

1. They expect 2014 to be a tougher market for stock investing . "In a market like 2013's, almost all stocks go up," said Craig Hodges, co-manager of $354 million Hodges Fund , whose 57.02% gain made it 2013's top-performing midcap blend fund. "The next two to three years will be good but more normal. It will take good stock-picking to succeed."

2. While small-cap stocks and funds outperformed in 2013 overall, the market rotated toward large caps in the fourth quarter. That tilt may continue in 2014. "Large caps are the cheapest part of the market," said Hodges, who also runs a small-cap fund. "So there's opportunity there."

3. Given 2013's big run-up, many investors are bracing for a correction. "In 2014 I think the market will end up 10% to 15%," said Thomas O'Halloran, lead manager of $153 million Lord Abbett Micro Cap Growth , whose 78.12% gain led its small-cap growth category and was tops among all diversified, nonleveraged U.S. stock funds. But he forecasts a 15% to 25% market correction along the way.

4. Expect more volatility, Russ Koesterich, BlackRock's global chief investment strategist, says in his latest market commentary.

5. European stocks are poised for a rebound, fueled by a 14% growth of corporate profits in the Stoxx 600, Deutsche Asset & Wealth Management (DA&WM) forecasts.

6. China's rotation to a consumer-driven economy from an export orientation could slow GDP growth, DA&WM says.

7. Investors with long time horizons should bet on emerging markets, which have been driven down to attractive valuations, Koesterich says.

8. Municipal bond fundamentals and low prices are attractive, especially in view of higher taxes in 2014, Koesterich says. Things that will stay the same in fixed income: price declines on long-dated Treasuries and TIPS because rates are likely to rise and inflation is still low, he wrote. His prescription: Stick with credit sectors like high-yield bonds.

Dennis Lynch, manager of $1.2 billion Morgan Stanley Institutional Growth , says search engine companyQihoo ( QIHU ) is starting to take market share fromBaidu ( BIDU ). And that market is growing a lot.

Nancy Zevenbergen, lead manager of $46 million RidgeWorth Aggressive Growth Stock -- whose 58.18% gain topped large-cap growth funds -- likesGoogle ( GOOG ). "The company's balance sheet is so strong that they can invest in areas that don't bring earnings to the bottom line next year," Zevenbergen said. "You can buy them today at an interesting valuation for the future."

Hodges likes railcar maker and lessorTrinity Industries ( TRN ), which benefits from growing GDP. In particular, it benefits from rail transportation of oil, which is growing due to an energy boom. In turn, that fuels what Hodges calls a new U.S. industrial revolution.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

This article appears in: Investing Mutual Funds
Referenced Stocks: BIDU , GOOG , QIHU , TRN

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