By Suzanne McGee
After enduring the most volatile market swings in the U.S. stock
market in more than three-quarters of a century, even the
best-performing mutual-fund managers might be forgiven for wanting
to socially distance themselves from anything to do with
stocks.
But some have thrived. While the spring's selloff, followed by
an almost eerily rapid and dramatic rebound, may have driven some
investors into hiding, the active professional managers with the
best performances over the past 12 months are riding out the storm.
They have stuck with their strategies over the long term.
"We go through periods where we look stupid compared to a lot of
other people, or to the market," says No. 1 manager Dennis Lynch,
head of the Counterpoint Global team at Morgan Stanley Investment
Management and manager of Morgan Stanley Institutional Discovery
Portfolio (MPEGX). He's looking smart now: The fund won our latest
Winners' Circle contest with a 12-month total return of 56.2%.
For the year to date through June 30, the fund was up 59.3%.
The quarterly Winners' Circle review is based on the trailing
12-month performance of actively managed U.S.-stock funds (those
with at least $50 million in assets, a three-year record and that
don't employ leverage or rely on quantitative screens to select
their holdings). Index funds don't qualify, as this review measures
stock-picking prowess.
The long-term focus helped Mr. Lynch and his colleagues identify
early some of those businesses that have held up during selloffs,
or even profited during the pandemic, like videoconferencing app
Zoom Video Communications Inc. Certainly, a combination of skill
and luck led to Morgan Stanley growth-stock funds capturing three
spots out of the top five in this quarter's collection of winning
managers.
The Winners' Circle list was dominated by growth funds -- which
focus on companies that promise rapidly increasing profits and
revenue -- run by Morgan Stanley and by Zevenbergen Capital. (As
always, the Winners' Circle funds aren't investment
recommendations, despite their short-term returns. Some funds are
reserved for institutional investors, requiring high minimum
investments.)
"Our strategy has been to collect a portfolio of unique
companies that have a strong competitive position and offer big
growth opportunities over the long term. We don't try to make any
shorter-term predictions," says Mr. Lynch.
The strong performance of his Discovery fund, as well as Morgan
Stanley Insight (CPODX) and Morgan Stanley Institutional Growth
(MSEQX) -- which ranked No. 3 and No. 5, with returns of 49.0% and
46.3% -- is the result, Mr. Lynch says, of winnowing through broad
indexes in quest of outsize long-term potential. In an environment
like this, Mr. Lynch argues that selloffs and rallies grab
headlines but don't capture an investor's real opportunities and
risks.
"Limited pockets have done very well, some things have not
recovered and others have been decimated," he notes.
Both Mr. Lynch and the management team at Zevenbergen are repeat
winners and/or runners-up in this quarterly contest, but never
before has the list of top-performing funds been dominated by only
two fund families. The institutional class of Zevenbergen Growth
Fund (ZVNIX) ranked second in terms of its 12-month return, posting
a gain of 53.3% for that period and 52.5% for 2020 so far. In
fourth place was Virtus Zevenbergen Innovative Growth Fund (SAGAX),
which rewarded investors with a 48.8% return for the 12 months, and
is ahead 48.7% for the year so far.
Other funds run by the two teams at Morgan Stanley and
Zevenbergen also made the list of the 10 best performers, based on
data from Morningstar: In all, seven of these top 10 actively
managed funds were run by the same two growth-investing teams.
One of the holdings that has made both management teams' winners
for this period is Zoom. "The pandemic and the economic shutdown
didn't form part of our investment thesis," says Anthony Zackery,
one of the portfolio managers who oversees the Zevenbergen funds.
But, he adds, the economic shutdown that has accompanied the spread
of Covid-19 has benefited many of the team's top investment ideas,
as consumers and businesses reinvent how they interact and live
their lives.
"Even before this happened, the vast majority of the companies
and themes we've been investing in are tied to digital
transformation," says Joe Dennison, another member of Zevenbergen's
management team. "Many of our companies are experiencing growing
adoption rates in the midst of this, and that has benefited the
portfolio."
Mr. Lynch began accumulating a stake in Zoom when it went public
last year and added to his funds' holdings in the final months of
2019. "We thought it had interesting qualities even before all this
happened," says Mr. Lynch. "It's hard to call anyone a winner at a
time like this, but [Zoom's] CEO and founder has done some pretty
incredible things and been impressive in how he has reacted to some
of" the firm's problems and growing pains. Specifically, Mr. Lynch
points to Zoom's rapid moves to address security by recruiting
experienced top talent in that area.
Both investment-management teams emphasize the long-term nature
of their strategies. "People spend too much time talking about
tactics and timing; about when they are buying versus what they are
buying," says Mr. Lynch.
Other holdings in Mr. Lynch's funds that he believes will reward
his investors in both the short and longer term include
music-streaming service Spotify Technology SA and Twilio Inc.,
which enables consumers to communicate more effectively with newer
businesses like ride-sharing and food/merchandise delivery
companies. Mr. Lynch says that while Twilio stock lagged behind the
market at the height of the pandemic selloff, its fundamentals
remain strong and it has had a pickup in usage by new clients
including health-care providers. "We could have overreacted and
sold it," Mr. Lynch says. Instead, he focused on that long-term
potential to expand its reach and market share.
Mr. Dennison's emphasis on the longer term mirrors Mr. Lynch's.
"We want to own shares in those companies that will demonstrate the
best growth over the next three to five years," Mr. Dennison says.
That means being prepared to ride out volatile periods in the
markets. "Opportunities are rarely linear" in nature, he says.
In the Zevenbergen funds that own large and midcap stocks, the
team has accumulated stakes in businesses like Trade Desk Inc.,
which specializes in online-advertising technology, and Teladoc
Health Inc. The funds have owned both stocks for some time, and
both are seeing greater growth potential in the pandemic economy as
streaming television becomes more common and telemedicine has
established itself.
In Zevenbergen Genea Fund(ZVGIX), which ranked No. 7 in this
quarter's competition with a 44.5% 12-month return, the managers
invest in earlier-stage businesses, many of which are also thriving
as consumers direct more of their purchases toward small online
merchants. The fund's holdings include Etsy, which has had a surge
in transactions as bricks-and-mortar retailers have closed.
A Morgan Stanley smaller-cap offering, Morgan Stanley Inception
Portfolio (MSSGX), also made the list, at No. 9, with a 12-month
return of 42.2%, and 43.7% so far in 2020.
"We're not trying to make any short-term predictions about where
we go from here," says Mr. Lynch. In this environment, as in any
other, "You have to be willing to be different and often be willing
to look like a fool, over shorter time periods. You can never have
the mind-set that you've won the game."
Ms. McGee is a writer in New England. She can be reached at
reports@wsj.com.
(END) Dow Jones Newswires
July 05, 2020 20:58 ET (00:58 GMT)
Copyright (c) 2020 Dow Jones & Company, Inc.
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