As readers of the missives know, the three sectors we have really liked are Financials, Technology, and Industrials. Therefore, we were excited to arrive in Boston last week to see portfolio manager (PMs) and renew friendships. We were particularly pumped to meet with David Ellison, PM of the Hennessy Small Cap Financial Fund (HSFNX/$24.86) and the Hennessy Large Cap Financial Fund (HLFNX/$23.34), funds that I own personally. We first met Dave in the 1980s when he was managing the Fidelity Select Bank and Thrift Fund. From there, he went to Friedman, Billings &Ramsey (FBR) and managed two similar funds. Dave is arguably the smartest person we know on the financial complex. In fact, he actually went to 40% cash in early 2008, something most PMs won’t do. A number of years ago, FBR sold its asset management business to Neil Hennessy, captain of the Hennessy Funds, which is where Dave currently hangs his hat. Over the weekend, we read an article titled “Dividend Investors Take Note: Rising Rates Will Benefit Banks.” Plainly, we agree and recommend tilting accounts accordingly.

We also spent a lot of time with our friends at Putnam. First up was Darren Jaroch, PM of the Putnam Equity Income Fund (PEYAX/$24.89), also a fund that I own. We have met with Darren a number of times, and it is always informative. While many topics were covered, here are a few of his thoughts: he likes Japanese trading companies; copper has held its price near the highs despite the 10% pullback in the equity markets (strong economy); to be underweight Europe is dangerous, because Europe is no longer in recovery, rather, in economic expansion; the euro at $1.25 is not nearly as bad as two years ago; and unit labor costs in China are greater than the U.S. To that last point, we have argued there is a sea change occurring.

Foxconn, the world's largest contract electronics manufacturer, and based in China, announced it was going to build a huge manufacturing plant in Wisconsin. That announcement begs the question WHY? Well, not only are wages going up in China, but the quality of manufactured products is going down. We think that suggests Mexico may be the new China for the U.S. Believe it or not, manufacturing standards in Mexico are up to U.S. standards. That point was reinforced by a senior executive at one of our large automobile companies who told me, “That’s right, the most productive and efficient plant we have is located in Mexico.” This is one of the reasons we have recommended various railroad stocks that play to this theme. Darren agrees and particularly likes the western and southwestern railroad companies.

Next, we met with Bill Kohli, PM of the Putnam Diversified Income Trust (PDINX/$7.07), yet another fund I own. Hereto, we have known Bill for a number of years and always enjoy meeting with him even though we are not really bond-centric investors. Bill’s fund seeks multiple sources of return outside the constraints of its benchmark, investing across traditional and alternative bond markets. Currently, the fund has a slight negative duration, because he thinks interest rates are normalizing and will trend higher at a gradual pace. He noted the default rate is only 1.1% and should go lower and that corporate balance sheets are really good. He also thinks we are working our way into tolerating higher interest rates. It’s the perfect environment.

The final meeting at Putnam was with Daniel Grana, PM of the Putnam Emerging Market Equity Fund (PEMMX/$13.23). This was my first meeting with Daniel, but it will not be my last. In fact, after chatting with him for over an hour, I went out and bought his fund. He asked me how I felt about emerging markets (EM), and I responded, “I like them if you have a three-year plus time horizon.” We chatted about the potential for a trade war with China. His thoughts are that the Chinese have a “scaled response” that would still be compliant with the World Trade Organization (WTO). For example, they could buy Airbus planes instead of Boeing planes. Also, the Chinese are primed and ready to target U.S. multinational companies. We then talked about Russia, since I think it is the cheapest stock market around. Daniel told us 2.5% of his fund is in Russian equities, because consumer spending is rising, Russia’s debt-to-GDP is under 20%, budget break-even cost for a barrel of crude oil is ~$40, and Russia trades at a 50% discount to the EM complex. We were very impressed with Daniel.