In the first quarter, as the S&P 500 sputtered to a 1.2 per cent loss and many sectors sagged, the managers of three of the top-performing mutual funds scooted ahead by betting on growth stocks and Latin America.
Christopher J. Bonavico, of the Jackson Square SMID-Cap Growth Fund, said he and his co-manager, Kenneth F. Broad, are growth-stock Sherlocks who investigate companies with a value-investor mindset.
“We’re looking for growth in the intrinsic value of the business,” Bonavico said. “A lot of traditional growth investors just want high-revenue growth and earnings-per-share growth. But that’s not enough to tell you whether something is a good business. We want to see a good return on invested capital and good free cash flow.”
They sleuth among small- and mid-cap outfits and shy from the tech giants, like Alphabet and Amazon, that have felt so much investor ardour over the past several years. Instead, they’ve toted up gains in holdings as diverse as Dunkin’ Brands Group and Wix.com.
Many people misunderstand the investment case for Dunkin’, associating the company with its doughnuts and its omnipresence in the Northeast, particularly New England, Bonavico said. Its promise instead lies in caffeinated beverages and in the company’s potential for growth in the rest of the United States.
“Coffee is the major driver — it’s a daily purchase, it’s habit-forming, and it’s got a 90 per cent margin,” he said. “And there’s an enormous opportunity for them to add franchisees west of the Mississippi.”
Wix, for its part, is known as a website builder for small businesses. Bonavico said he and Broad believe the company has a better strategy than competitors like Squarespace and GoDaddy.
“Wix has zero salespeople — they compete only on the quality of the product,” he said. “And they’re the only one using the freemium model.” Wix customers can pay nothing for basic service or pay up for more features.
The Jackson Square fund officially began in 2016, two years after Bonavico and Broad and several colleagues formed their own firm, Jackson Square Partners. Bonavico and Broad previously managed the Delaware Smid Cap Growth fund, starting in 2005 and continuing through 2016.
Jackson Square Partners is also an adviser to the Vanguard US Growth Fund, a large-cap offering.
In the first quarter, the Jackson Square SMID-Cap Growth Fund returned 8.73 per cent. Its investor shares carry a net expense ratio of 1.23 per cent.
Betting on big themes
Michael A. Lippert, manager of Baron Opportunity Fund, runs a go-anywhere growth offering — he’ll snap up shares, regardless of a company’s market value, if he likes its prospects. Lippert said he and his Baron colleagues try to identify major ideas — “big generational shifts in society” — and bet on the companies that are positioned to exploit them.
Among those themes are cloud computing, big data and sustainable energy. To winnow the many outfits clambering in these fields, Lippert will assess the durability of a company’s competitive advantage and the quality of its management, in addition to its fundamentals.
That led him to a stock that some investors might dismiss as a laggard — Microsoft. Lippert said Microsoft’s chief executive, Satya Nadella, who took over in 2014, has reoriented the company by focusing on cloud computing and artificial intelligence. “Microsoft used to just sell you Office,” he said. Today, thanks to its software-as-a-service approach, the company knows how customers are using its products and can continuously update and personalise them.
Another of his top holdings, Tesla, has lately stumbled. The company fell behind on the production of its latest electric car, the Model 3, and was punished with a sliding share price for much of the first quarter. Lippert said he saw the company’s woes as more of a stall than a breakdown.
Tesla is trying to optimise and control every phase of its electric-car production, he said, and that’s both potentially revolutionary and extremely challenging, Lippert said. “People understand that, but they aren’t giving them room to do it.”
Lippert’s fund, with an expense ratio of 1.41 per cent for its retail shares, returned 9.2 per cent in the first quarter.
Bulking up with Brazil
Growth also matters to Will R. Pruett, manager of the Fidelity Latin America Fund. But for him, it can be the expansion of national economies, not of corporate earnings, that ends up determining his fund’s fate. He hunts mainly in some of the emerging economies of North and South America — Brazil, Mexico, Colombia, Chile and Peru. While Pruett says he is a bottom-up stock picker, his portfolio can be buffeted by the political and economic vagaries of volatile regions.
Lately, he has found value in Brazil, wagering nearly a fifth of the fund’s assets on two affiliated companies — Itausa, a Brazilian conglomerate doing everything from banking to manufacturing, and Itau Unibanco Holding, a financial subsidiary of Itausa.
“What’s interesting about Brazil is, when you compare it to any other major market in the world, it’s the only one on its own economic cycle,” he said. “They went through their own depression, and they’ve just emerged from that. All economic data is signalling they’re past the worst.”
Criminal conviction
Brazil, a major oil producer, had been sapped by low oil prices and walloped by a political scandal that originated with its state-owned oil company, Petrobras. The upheaval culminated with the criminal conviction of a former president and the impeachment of his successor. Pruett said the scandal has been painful but “the institutions in Brazil are working and are going to be a lot stronger coming out of this.”
Brazil’s economy is one of the world’s largest, and its stocks represent about 60 per cent of the leading Latin America benchmark index — MSCI Emerging Markets Latin America.
Throughout Latin America, Pruett said, banks tend to be family controlled and operated, which typically aligns their interests with those of outside shareholders. On top of that, “Markets are concentrated, and the penetration of financial services is low,” he said.
Consider Peru, home to one of his top holdings, Credicorp, a major bank in a country with 31 million people and an economy growing at 6 per cent a year. It is one of four banks that dominate the country’s financial system.
“They each have about a quarter of the market,” Pruett said. “Margins are high.”
Investors have noticed, pushing Credicorp’s stock up nearly 50 per cent over the last year. “The banks in Latin America are long-term winners.”
Pruett’s fund, with an expense ratio of 1.09 per cent, returned 10.5 per cent in the first quarter.
