What makes $1.4 billion BlackRock Large Cap Focus Growth Fund (MAFOX) one of the best mutual funds? Start with its ability to outperform consistently.
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The fund was an IBD Best Mutual Funds Award winner last year, for having outperformed the S&P 500 in calendar 2018 and in the three, five and 10 years ended that year on an average annual return basis.
And going into Wednesday, the fund was ahead of the big-cap bogey again over the past 12 months, 30.16% vs. 26.39%, as well as its large-cap growth rivals’ 27.87% return as a group.
A key reason for that sort of outperformance is portfolio diversification. Rather than betting on just one type of stock, this fund seeks three types of growth stocks. Manager Lawrence Kemp calls them superior growth, durable growth and periodic growth.
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Best Mutual Funds: This Fund’s Best Ideas
Investing in those three types of growth stocks helps this portfolio remain one of the best mutual funds by providing it with an all-weather lineup of holdings.
Ideally, the three types of growth stocks have little correlation — especially superior and periodic growers, Kemp says. As the market rises and falls, some holdings thrive even if others lag. “We’ve built a process that we think can navigate across whatever happens in the macro world,” Kemp said.
Even in an environment like today’s, which Kemp characterizes as benign, the fund’s managers aim to minimize risk by spreading their bets. “Inflation is low, interest rates are low in this Goldilocks environment,” Kemp said. “It’s still a great time to invest in growth stocks. But we want to be diversified.”
Still, this fund tries to turbocharge its diverse plays by putting its shareholders’ money behind only the managers’ best ideas. The fund tends to invest in just 25 to 45 stocks. It held 45 as of Jan. 31.
But concentration has risks. “Mistakes hurt more when you’re concentrated,” Kemp said. “A lot of our competitors run just 25 to 30 stocks.”
The Fund’s Brain Trust
Kemp has managed the fund since 2013. Phil Ruvinsky was made a manager of the fund on Feb. 1, after serving as an analyst since 2002. He also manages other BlackRock funds.
The fund’s top 10 holdings as of Jan. 31 include Amazon.com (AMZN), Microsoft (MSFT), Visa (V), Mastercard (MA) and Facebook (FB). The other five are Alphabet (GOOGL), ServiceNow (NOW), S&P Global (SPGI), Salesforce.com (CRM) and Netflix (NFLX).
Three Types Of Growth Stocks
Kemp, who does not comment on individual holdings, describes his three buckets of growth stocks this way:
“Superior growth companies are best-in-class,” he said. “They offer unique solutions and products. They tend to be able to take those solutions globally. They tend to be asset-light. But they also tend to be expensive, which means expectations for them are high. And their durations of growth are often misunderstood (by some investors).”
Despite being expensive, those companies’ high revenues, free cash flow and earnings growth enable many of those “companies to grow into their high valuations and become attractively priced again, even if multiples today may be a bit stretched,” Kemp said.
He added, “Examples are payment processing companies. Basically, they’ve taken advantage of the migration from cash to debit and credit cards around the world.” Visa and Mastercard are in that group.
Which Stocks Provide Superior Growth?
Medical devices makers are also superior growth companies, Kemp says. Intuitive Surgical (ISRG), a holding as of Aug. 31, makes robotic surgical systems.
Leaders in e-commerce and online advertising are also superior growth companies, Kemp says. Amazon is a leader in e-commerce. Alphabet’s Google and Facebook are leaders in digital advertising.
Durable Growth Equities Help This Portfolio
Durable growth companies also tend to be asset-light since many provide a service based on software. They also tend to have pricing power, Kemp says.
“And they act as ballast in a storm,” Kemp said. That’s because they tend to be more mature companies, with higher free cash flow yields. For that reason, they tend to hold up much better than superior growth companies in a market sell-off, Kemp says.
Microsoft, Salesforce.com and ServiceNow are likely to be key constituents of that group.
Why This Mutual Fund Uses Cyclical Stocks
“Periodic growth stocks tend to be more cyclical,” Kemp said. “In a downturn they tend to lose pricing power. But we tend to find business models that actually, even though in a downtrend their unit (sales) go down, they do tend to have better pricing power, which is something like a paint or aggregates company.”
Sherwin-Williams (SHW) makes paints and other coatings. It also runs paint stores.
Vulcan Materials (VMC) produces aggregates, asphalt mix and concrete for the construction and paving industries.
This BlackRock fund is available through brokers and company sponsored retirement plans.
Follow Paul Katzeff on Twitter at @IBD_PKatzeff for tips about personal finance and the best mutual funds.
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