By Ross Kerber
BOSTON (Reuters) - Federated Capital Income Fund has made a bundle with optimistic bets since the financial crisis. The question now is how it can maintain its strong returns.
The answer is a stock-heavy portfolio padded with oil companies, banks and technology shares, according to co-manager Linda Bakhshian, who believes the economy is still improving and interest rates are poised to climb.
The $2.2 billion (1.29 billion pounds) fund with Pittsburgh-based Federated Investors Inc (N:FII) beat 95 percent of peers with its 9.94 percent returns over the three years ended July 25. Bakhshian and other managers had raised the stocks portion of the portfolio to around 50 percent from 40 percent in 2010, betting that the market would recover.
The rest of the fund is mainly in bonds and cash.
Now net deposits are surging. They have hit $744 million so far this year, up from $673 million in all of 2013, and just $95 million in 2012, according to Lipper, a Thomson Reuters unit.
With the pressure on to keep producing good results, Bakhshian, who runs the fund's equities portfolio, says she is keeping the focus on stocks that can harness a continued economic upturn.
"We're looking at stocks that have pricing power, those that can pass on higher prices" to consumers, she said. "These are large companies with established products and market share-leading positions."
Capital Income had 20 percent of its stock holdings in energy at June 30, above the roughly 8 percent that the sector occupies in the Dow Jones Select Dividend Index.
Lately Bakhshian has been buying shares of France's Total SA (PA:TOTF), the fund's largest stock holding, and Royal Dutch Shell Plc (L:RDSa).
She said she liked their worldwide facilities, which should help them manage geopolitical volatility. She also cited their dividend yields of more than 4 percent, compared with 2.5 percent for Exxon Mobil Corp (N:XOM), which is not in the fund.
Capital Income also has a relatively high position in financials. Bakhshian said that industry had done much to repair itself since the economic meltdown and was poised to gain from an improved economy. Her picks include Royal Bank of Canada (TO:RY) and Sun Life Financial Inc (TO:SLF), filings show.
Bakhshian also has added technology stocks like Apple Inc (O:AAPL) in the past year. Apple shares took a nearly 50 percent hit between the autumn of 2012 and the spring of 2013 and are now on a steady climb. She praised the company's dividend, which began in 2012, and expects new products like an updated iPhone to help sales.
"The valuation still seems very reasonable," she said.
To make room for those companies, Bakhshian has sold shares in others she said might have trouble distinguishing themselves in an improving economy. These include some consumer companies like diaper and household-products maker Kimberly Clark Corp (N:KMB). "It's very commodities," she said.
(Editing by Richard Valdmanis and Lisa Von Ahn)