Panel of Eaton Vance Investment Professionals Predicts Large-Cap, Blue Chip Stocks Will Outperform; Outlines New Definition for Growth

Eaton Vance Corp., the Boston-based investment management firm, convened a panel of investment professionals yesterday at a luncheon held in Manhattan’s legendary Rainbow Room. Duncan W. Richardson, chief equity investment officer at Eaton Vance, led the discussion, accompanied by Eaton Vance portfolio managers Michael Mach and Judith Saryan. The three investment professionals discussed why Eaton Vance is optimistic on the stock market now and why its investment team believes long-term interest rates are likely to remain low. The three illustrated the case for outperformance by high-quality stocks over the next 3 to 5 years—specifically large-cap, blue-chip domestic stocks—in comparison to lower-quality assets which have ruled the roost until recently. "We’re at a point in the economic cycle where we believe quality, large-cap issues are likely to outperform going forward,” Richardson said. "We believe 2007 will be characterized by slowing economic trends, decelerating earnings growth, and some increase in market volatility. In this environment, the best-performing stocks are likely to be found among higher-quality companies.” Mach agreed, saying, "Our belief that larger-cap stocks are likely to outperform smaller issues this year is driven by attractive relative valuations now offered by large cap stocks and by our outlook for relatively stronger investment fundamentals among these stocks. With some stabilization in the dollar, domestic issues should also keep pace with international stocks in 2007--we believe investors won’t need to venture far from home to earn solid equity returns this year.” While the panel included a growth investor (Richardson) and two value-oriented investors (Mach and Saryan), the three were of a single mind on the appeal of quality assets in the current environment. They also concurred that it has become more difficult to discern between growth and value issues in today’s market, where the dispersion of price/earnings ratios is much less than at the start of the decade. "Stocks can be compared to horses permitted to wander back and forth between the "value barn”--with a low P/E placard above its doors--and the "growth barn”--with a high P/E sign above its entry,” said Mach. "Take Oracle, which was stabled in the growth barn when it traded at 100 times earnings earlier in the decade, and which has now arguably moved over to the value barn with a p/e ratio of 14 times earnings.” Mach explained that the ability of stocks to move from "stable to stable” muddies the value versus growth debate. Saryan agreed with this assessment of the growth vs. value argument, commenting that the age-old debate whether a stock is growth or value is passé. The discussion turned toward dividend-paying stocks, which have become increasingly popular of late due to investors’ rising enthusiasm for extracting income from stocks and the impending retirement of the Baby Boom generation. The dividend theme fed into the panel’s anticipation of outperformance by quality assets, as dividends can be a sign of quality. Companies can’t restate them and are reluctant to stop paying dividends once they start; hence dividends are also a signal of corporate confidence. "Paying a dividend is a sign of quality, and not just because it’s the only item on an income statement that can’t be restated,” said Saryan. "We look for companies that not only pay high dividends, but those that are growing their dividends, because such companies understand that cash belongs to shareholders. It’s something many companies forgot during the 1990s.” "We believe dividend growth is THE new definition of growth for the next decade,” Saryan said. "Cash flow growth is the most meaningful measure of a company’s health and future prospects, and companies can signal this to investors through the dividend levels and growth rates they declare.” The group contrasted projected lower profit growth rates with expectations for rising dividend growth. Earnings per share (EPS) growth have been historically high, with the three-year figure for the Russell 1000 Index surpassing 26%. Wall Street projections have that figure down to less than 10% over the next 3-5 years. By contrast, the five-year Dividend Growth Rate was 12% for the Russell 1000 Index. Mach projected, "With cash on balance sheets increasing and corporate profits shrinking, dividend growth may soon outpace EPS growth, and investors may be well served skewing their portfolio toward stocks that are growing their dividends.” Eaton Vance also served up some constructive asset allocation (and location) ideas for investors as the New Year commences. Capital gains distribution estimates for 2006 and the potential for tax bill surprises for investors were top-of-mind. Moderator Richardson suggested that with expectations for lower returns from stocks overall, investors ought to become more aware of the effect of taxes on investment returns and work harder to shield more of their returns from the long arm of Uncle Sam. "The results of recent Eaton Vance investor studies illustrate that few investors are realistic about the implications of cap gains taxes on their investment returns or, for that matter, understand the benefits of a tax-managed approach to investing,” said Richardson. "With expectations for lower returns overall, minding every penny of one’s return becomes increasingly important.” Among other key points, the Eaton Vance team urged Baby Boomers and other income seekers to shift a portion of fixed-income allocations towards large-cap, dividend-paying equities as an income replacement and diversification strategy. They predicted that finding ways to extract income from equities is a trend likely to accelerate over time, as Baby Boomers age. For those who invest in stocks but also have an income need, dividend payers have already gained renewed attention and appreciation. In general, the group said most investors should shift more into equities, specifically large-cap quality equities. "With lower anticipated returns from real estate and fixed income, we believe the asset allocation models of the last 30 years may be the wrong models to use going forward,” said Richardson. "Investors need to maintain equity exposure as they retire to help ensure they don’t outlive their assets.” In summary, despite some anticipated volatility, the panel predicted that 2007 will be a rewarding year for equity investors. The three investment professionals said they expected that more conservative equity investors--comfortable with owning larger-capitalization, higher-quality, home-grown domestic equities--will do quite well in the New Year. With an outlook for a stable, low interest rate environment and continued reasonable valuations for equities, the group was upbeat about investment opportunities across the growth and value styles in 2007. Eaton Vance Corp., a Boston-based investment management firm, is listed on the New York Stock Exchange under the symbol EV. Through its subsidiaries, Eaton Vance Corp. managed $128.9 billion in assets as of October 31, 2006. Eaton Vance is an adviser and distributor of investment companies and separate accounts for individual and institutional clients.