Investors are increasingly looking for active equity mutual funds that deviate from an index fund, but what’s inside these portfolios should be determined by forward-looking metrics to boost the likelihood of success.
Indeed, many investors and advisers have redeemed expensive “closet index” strategies and moved to lower-cost index ETFs and mutual funds. The challenge of course when taking stock-specific risks is that the market needs to agree with a fund manager’s best ideas to reward the fund.
There were 86 S&P 500 Index constituents down 10% or more in the first two months of the year, yet 63 other index members climbed 10% or higher, a reminder that not all stocks move together and strong stock selection is a virtue. Indeed, the large-cap growth mutual fund peer group was up 9.2% year to date through March 12, ahead of the 9.2% total return for the S&P 500 Growth benchmark and any passive ETF tracking the index. Some of the bright spots thus far have focused their assets on a handful of stocks that have shined.
The Marsico Focus Fund (MFOCX) is one example. The fund was up 9.1% to start this year. MFCOX was also in the top quartile of its Lipper peer group in 2017, rising 34%. The fund underperformed in 2016, however, serving as a reminder that asset managers should not stop educating investors about their fund just because of one bad of year.
The fund recently held 26 stocks, with management concentrating approximately half the fund’s assets in information technology stocks. Yet, seven of the top-10 holdings were CFRA Strong Buy or Buy recommendations, including strong performers Alibaba Group (BABA), Amazon (AMZN) and Netflix (NFLX). Despite the recent success, we agree with Marisco, the high valuation of these three does not fully reflect their fundamental prospects because they have strong revenues and/or earnings.
For the Prudential Jennison Focused Growth Fund (SPFZX), CFRA thinks what’s inside the portfolio of 32 securities is appealing. Like the Marsico fund, SPFZX is concentrated in the tech sector (54% of assets) but also in consumer discretionary (27%). Fellow CFRA Buy recommendation Tencent Holdings joins AMZN, BABA and NFLX in the top 10.SPFZX was up 16% to start 2018 even after rising 36% in 2017. Though the fund lagged in 2016, with a 3.5% loss, its 15% three-year annualized total return was stronger than 11% of its peer average.
When in a car, good drivers will glance to their rear and side-view mirrors, while focusing much of their attention on the front windshield to see what’s ahead. We think mutual fund investors are beginning to do the same.