Investing is a difficult game. That is why so many mutual funds lag behind their indices.
So when you find a fund with an excellent track record, it pays to investigate what the fund managers are doing – to learn some lessons.
The American Century Focused Dynamic Growth Fund ACFSX,
appropriate. The $2.8 billion fund beats its Russell 1000 Growth Index by more than 6 percentage points year on year over the past three and five years, according to morning star. It outperforms its high-growth category by 8.6 percentage points year on year over five years. It has a reasonable expense ratio of 0.65%.
The fund is co-managed by Prabha Ram, whom I recently caught up with. Ram grew up in India and came to the US as a teaching assistant at the University of Maine, where she earned a master’s degree in computer science. She then earned an MBA from the Wharton School at the University of Pennsylvania. Ram and three other portfolio managers have led this fund since 2016.
Here are the top five takeaways, with examples of specific stocks.
1. Own companies that can “land and expand” in large markets
Although we have been living in the digital age for years, many small businesses still do much of their business on paper. Bill.com BILL,
wants to change that. The company was founded by CEO René Lacerte, who started the online payroll company PayCycle in the late 1990s, which was acquired by Intuit.
Bill.com helps small businesses go digital in accounts payable and accounts receivable payments. But that’s just the beginning. Once inside a company, Bill.com digitizes other areas, such as managing cash and expense accounts.
Bill.com “lands and expands” with customers, but also uses their business partners to create a network of leads.
“Every vendor is a member of the network, even if it’s not a Bill.com customer,” Ram says. This network has approximately 2.5 million members. Bill.com also gets prospects from its partners, including Bank of America BAC,
JPMorgan Chase JPM,
and American Express AXP,
Turnover grew by 45% in the first quarter.
Founder-run companies like this one are worth considering because they often outperform.
2. Find innovators
Ram’s portfolio includes obvious innovators, including Tesla TSLA,
and alphabet GOOGL,
her top three positions. Let’s look beyond technology – to beer.
In the 1980s, Jim Koch, the founder of Boston Beer, began taking shares in beer giants Anheuser-Busch InBev BUD,
and Heineken HEINY,
by rolling out successful “craft” concoctions, starting with Samuel Adams. Koch helped invent the craft brewing category, essentially taking the country back to pre-prohibition times when the US had hundreds of regional breweries making tastier beers for local tastes.
The Boston Beer stock did very well, but then stopped in 2015-2017 when beer sales generally flattened. In response, Boston Beer helped put a new category on the map — with the Truly Hard Seltzer brand rolling out in 2106. It remains one of the leading hard seltzers.
“We were drawn to the company because of its history of innovation,” said Ram, referring to her fund’s early position from the second quarter of 2016. “The stock underperformed as the beer market was flattening, but they came up with Really Hard Seltzer. Was really more successful than we expected. It created a new category.”
This penchant for innovation at Boston Beer has helped keep Ram’s fund in the name. Other successful Boston Beer brands include Twisted Tea, Angry Orchard and Dogfish Head.
An important premise here is that in order to find innovative companies, you must look for companies that are led by people who have shown a talent for innovation in the past. Innovative managers tend to keep innovating. Boston Beer is constantly testing new seltzers, beers, hard ciders, spirits and other beverages. Shareholders are betting they’ll get through it again.
They will need the help. Shares of Boston Beer fell 20% on July 23 as so many competitors entered the hard cider niche. Revenue grew 33%, but net profit fell 1.6% as the company ramped up advertising costs to fight competition. The company lowered estimates for the year due to an expected slowdown in revenue growth.
But don’t calculate this innovator just yet.
“We recently announced plans to develop new innovative beverages with Beam Suntory, which we plan to launch in early 2022,” said Boston Beer’s Koch. Beam Suntory sells Jim Beam whiskey and other spirits. “We believe these new drinks will further demonstrate our ability to innovate and grow our business as drinker preferences evolve.”
3. Look for companies that can create and dominate a niche
For years, when the gig economy took off, the major credit card companies didn’t care so much if the local yoga instructor could accept credit card payments. square SQ,
saw this as an opportunity. Therefore, in 2009, it launched its card payment equipment business. Since then, it has grown by taking on larger clients and expanding into new financial services industries such as cash management, debit card lending and tax filing. Transaction-based revenues grew 27% in the first quarter and subscription and services revenues grew 88%.
This is a great example of a company that has created a business niche. But it is also a ‘land and expand’ business because it grows by offering customers new services. Both qualities help companies maintain the competitive advantage that Aries likes in investments.
4. Buy companies in the early stages of rapid growth
One way to find these is by identifying companies that develop products that will transform an entire industry. Ram thinks this is the case with Alnylam Pharmaceuticals ALNY,
It is developing new therapies based on a technique called RNA interference (RNAi). In the body, messenger RNA (mRNA) codes for proteins we need, based on signals from RNA. Sometimes mRNA crosses the signals and encodes defective proteins. This causes diseases.
Alnylam has developed a way to modify the RNAi pathway to silence the defective signaling and block the production of disease-causing proteins. So far, Alnylam has four approved RNAi-based drugs that treat rare hereditary diseases. The company has a dozen other therapies in clinical trials, including six in late-stage development.
“This is a completely new area of therapies,” Ram says. “It’s a platform of products that can treat a variety of conditions.”
5. Hold stocks for the long term
All of the above names are large positions in Ram’s fund, which tells me that Ram and her team believe they have significantly more upside potential. However, if you do buy one, remember to do so with a time horizon of several years. That’s what Ram’s fund does. It has a low annual portfolio turnover of 27%. It’s important to have a long-term view because it’s so hard to name short-term movements in the stock market or in stocks, and you need to give companies time to develop.
Michael Brush is a columnist for MarketWatch. At the time of publication, he had no holdings in any of the stocks mentioned in this column. Brush featured BAC, JPM, AMZN, GOOGL, TSLA and ALNY in his stock newsletter, Polishing stocks. Follow him on Twitter @mbrushstocks.