COHU Cohu Inc

By Suzanne McGee 

Sometimes, winning simply means that you lose less ground than everyone else.

That's certainly the definition of "outperformance" for those actively managed U.S.-stock mutual funds in our quarterly survey at the end of the first three months of 2020.

In a period that witness the global spread of the Covid-19 pandemic and the end of a long-lived U.S. bull market in stocks, all of the top performers saw their returns for the rolling 12 months slashed. Chris Retzler, manager of Needham Small Cap Growth fund (NESGX), watched his gains for the 12-month period ended March 31 plunge to 12.8%, after posting a return for the trailing 12 months ended Dec. 31 of 54.5%.

That performance, nevertheless, was good enough for Mr. Retzler to win top place in the quarterly Wall Street Journal Winners' Circle for the second time in a row. The contest measures the rolling 12-month performance of actively managed, diversified U.S.-stock funds with more than $50 million in assets and at least a three-year record. (Index, leveraged and sector funds don't qualify.) The funds tracked posted an average loss for the trailing 12-month period of 10.8%, according to data from Morningstar.

Mr. Retzler beat out his nearest rival, No. 2 finisher Baron Opportunity fund (BIOPX), by almost 5 full percentage points in our survey. Michael Lippert, manager of the Baron fund, generated a gain of 7.8% for that 12-month period but managed to outperform Mr. Retzler's fund for the first three months of the year by holding losses to only 6.7%. The Needham fund recorded a first-quarter loss of 15.0%.

Adjusting to tumult

Most of the funds in our survey that beat their peers and the market itself amid the recent volatility and selloffs may not impress investors by the size of their gains. As disappointed shareholders often mutter during big downturns, it's tough to celebrate relative outperformance, as opposed to big absolute gains. Still, this quarter's winners shielded their investors from at least part of the damage. They are also adjusting rapidly to the market tumult.

"It's going to take time to get back to a new normal," says Mr. Retzler, who admits the rapidity of the market's plunge caught him off-guard. Still, he had been anticipating some kind of selloff this year.

"At the end of 2019 we were overweight cash, and we didn't deploy it," Mr. Retzler says. "We continued to sell in January, because we felt the economy was likely to slow down," he adds. "It's hard to sustain the level of activity we've seen, which told us a correction was needed. Admittedly, this one was more significant than we thought would occur."

Mr. Retzler believes the selling isn't over.

"It's a new quarter, sure, but I'm not sure it will be all that much better," he says. He predicts the market will test lows recorded in March.

"But we think this retest will be incredibly healthy for creation of the next bull market," he argues. "In the second half of 2020, we expect to see a significant snapback in global economic activity, thanks in part to significant stimulus" in the shape of rock-bottom interest rates and government programs.

That's why Mr. Retzler, like other top performers in this quarter's survey, is "buying the dip," on a selective basis. He says he has been adding to his stakes in favorite holdings since February. In addition, he has established new positions in stocks that suddenly have become much more affordable, thanks to the 20% plunge in the S&P 500 index in the first quarter (the largest since 2008) and the 18.7% dive in the Dow Jones Industrial Average (the biggest recorded since 1987, before some of the managers in our survey had even finished high school). "They are trading at valuations we could never have expected."

Mr. Retzler says that internal compliance rules prevent him from discussing details about recent trades. Most other managers face similar constraints.

Looking ahead

In general, however, he says he thinks once the market recovers it will boost the long-term outlook for companies like online consumer-loan portal LendingTree, which has been part of his portfolio off and on in recent years. "It has exposure to a recovery in consumer spending, and we think when this is over, consumers will be taking advantage of lower interest rates to refinance, buy a house or use other LendingTree tools to evaluate their financial position," he argues.

Mr. Retzler remains a fan of any companies that will benefit from the rollout of 5G wireless technology and the software sales business. That has led him, over time, to own stocks like Cohu Inc., which designs and manufactures semiconductor-testing equipment. He's also a fan of Limelight Networks Inc., which offers customers streamed-content-delivery services.

Shares of Limelight, which operates in a segment that is currently benefiting from the fact that three-quarters of the U.S. population is indoors, have bounced back from a low of $3.66 in mid-March to close on Friday at $5.47, near their high of $6.07 recorded in mid-February.

Many of the top-performing funds in the Winners' Circle contest have continued to attract new inflows of cash from investors.

The market might look like some kind of theme-park terror ride, but "even this morning, we had flows coming in," says Baron Opportunity's Mr. Lippert.

Mr. Lippert is putting that money to work in businesses that he believes will get through the storm not only intact, but with a stronger market share or competitive edge, such as Zoom Video Communications (an online platform that quarantined Americans are using to hold video business meetings, take classes, discuss book-club selections or virtually share a martini). Other favored businesses include CrowdStrike Holdings Inc., a cybersecurity company, and online retailer Amazon.com. He has been eyeing the health-care area, looking for opportunities to invest in new drug developments.

"The nature of my portfolio and investment strategy meant that I didn't own any companies that had liquidity concerns," Mr. Lippert says. "And since I had been emphasizing the digital transformation of the economy, I didn't own hotels or cruise lines." Instead, he had an array of "up and coming" technology businesses on his watch list that have become more affordable in recent weeks, like Datadog Inc., which monitors how a client's databases, servers and apps are performing.

An emphasis on avoiding weak spots and focusing on businesses that will remain fundamentally strong and recover more rapidly than the broader economy also buoyed No. 4 finisher Virtus KAR Mid-Cap Growth fund (PHSKX) for the first quarter of 2020 (it lost 8.3% in the quarter, less than half the average loss in our survey group). For the trailing 12 months, its 5.5% gain placed it just behind another Virtus offering, No. 3 finisher Virtus Zevenbergen Innovative Growth Stock fund (SAGAX), which recorded a 6.5% advance.

Like his outperforming peers, Virtus KAR manager Doug Foreman, the chief investment officer of Los Angeles-based Kayne Anderson Rudnick (which manages the Virtus funds), continues to buy shares of those companies he expects to profit most from a recovery. He also continues to see inflows. "We've seen $200 million of inflows so far this year," he says, adding that his fund now has about $800 million in assets under management.

Some of that new capital is being directed to businesses like Domino's Pizza Inc., which has been in the fund for more than seven years. "People are probably going to order plenty of pizzas, even in this environment," says Mr. Foreman, who also likes Pool Corp., the largest wholesale supplier of swimming-pool supplies and parts. "Its market share gives it pricing power, and most of its business comes from people who already have pools, with only a small percentage tied to new-home construction."

Looking for a sign

Uncertainty about the final toll the new coronavirus will take might continue to overshadow financial markets. Nonetheless, each of these three managers remains optimistic about the outlook for the stock market, which they believe could begin its recovery just as rapidly as it did in 2009.

"All the markets need at these levels is some kind of sign that business will get back to normal in the future," says Mr. Foreman.

When that will be, and what that "normal" will look like, remains unclear. But the managers see one difference between what is happening now and market crises of the recent past. This time, the driving force is a public-health crisis, not market excesses like a meltdown in subprime bonds, internet stocks in 2000, or even junk bonds decades ago. Thus, the managers remain upbeat, at least when they are talking about the long-term market outlook.

"I truly don't know whether we'll be OK in the fall," says Mr. Lippert. But, he adds, that isn't the point. "We want to look from point A, today, to a point B that is three to five years out and not try to guess what's going to happen tomorrow."

Ms. McGee is a writer in New England. She can be reached at reports@wsj.com.

(END) Dow Jones Newswires

April 05, 2020 22:26 ET (02:26 GMT)

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