Managers of $187 million Goldman Sachs Strategic Growth Fund (GSTIX) protect its status as one of the best mutual funds by thinking outside the proverbial box. In particular, the fund is is less gung-ho than many large-cap growth managers about the widely popular, megacap FAANG stocks.
“Unlike many growth-fund managers, we try to keep a pretty balanced portfolio and not just own what our peers mainly own in technology or FAANG stocks,” said Stephen Becker, co-lead manager.
A key reason the fund does not bet as much on FAANG stocks — Facebook (FB), Apple (AAPL), Amazon (AMZN), Netflix (NFLX) and Google-parent Alphabet (GOOGL) — as many other growth managers is that Becker and co-lead manager Steven Barry focus on finding stocks that provide durable growth.
And FAANG stocks don’t seem to be the very best candidates to deliver durable growth. Other stocks that are younger, smaller and less pricey look better positioned to enjoy strong growth for years to come, Becker says.
Best Mutual Funds: Why This One Underweights Popular FAANG Stocks
To be clear: the fund owns all five FAANGs. All but Netflix were top-10 holdings as of Sept. 30. Still, “we like FAANG advertising names more than some others. But we are largely underweight in FAANGs vs. our peers,” Becker said.
Facebook and Alphabet’s Google are advertising-centric.
So, what stocks do managers of the one of the best mutual funds like?
Look at e-commerce. “We like Etsy (ETSY) more than Amazon,” Becker said. “It’s earlier in its life cycle. It’s a company that will emerge from the pandemic as a much stronger platform as a result of people experimenting with online shopping.
Becker added, “Many might have been comfortable shopping online only on Amazon before. But now they’ve found they like Etsy. And they’re coming back, buying masks (to guard against coronavirus infection), buying other products. They had a pleasurable experience, so they’re going back to shop for holiday gifts. People feel better about doing that than sending all of their money to Amazon.”
IBD 50 member (as of Dec. 21) Etsy’s earnings per share grew 436% and 483% the past two quarters. They declined 22% and 58% the two stanzas before those.
Tilting Toward Stocks The Pandemic Helps
What does one of the best mutual funds like about Veeva Systems (VEEV), another IBD 50 member? For one thing, it is another company that Becker and Barry believe will gain strength from the pandemic.
Veeva’s software enables drugmakers to document countless steps during drug development. Its early focus was in life sciences. Now the company’s success within that area is broad. Its software is also used to manage sales and operations as well as comply with regulations.
Veeva’s Vault is a cloud-based content management platform and suite of applications. It provides life sciences companies with a single depository of documents and data.
In addition, Veeva has expanded beyond life sciences in areas such as consumer packaged goods and chemicals.
“The unfortunate pandemic accelerated a shift that was already taking hold,” Becker said. “This company makes software that allows drug companies to directly market products to doctors in a virtual format,” Becker said. Virtual presentations replace the need for a human salesperson to visit a doctor’s office. They also provide physicians access to research and drug-use instruction.
Veeva is unique in its niche — software for pharmaceutical and biotech companies.
“Their margins are higher than any software company of comparable size,” Becker said. “And they have an extremely large total addressable market (TAM) that they continue to expand.”
Using Genomics To Develop A Cancer Test
Some holdings help make Strategic Growth one of the best mutual funds even before they post an annual profit. That describes Guardant Health (GH). One of its most promising products has yet to win approval from the Food and Drug Administration (FDA).
The company is using cutting-edge genomics to develop a new test for early-stage cancer. It promises to be simpler than a colonoscopy. And it might be the only way to test for other cancers, Becker says. “This would be a brand-new opportunity in the market,” he said.
Overall, the new test “has moonshot type upside,” Becker said.
Becker added, “They have other products on the market. They’re working on proof of concept for this new test. They’ll start with approval for one indication. Once they get approval from the FDA, they’ll start looking for other uses.”
Guardant has yet to post an annual profit. It lost 84 cents a share in 2019. It is expected to lose $2.19 in 2020 and $1.45 in 2021, according to analysis by MarketSmith. “We expect them to turn profitable by 2024,” Becker said. “Gross margins are already close to 70%, showing the power of their economic model when they scale up.”
Still, the share price is up more than 60% this year. “This is a good example of why we like to think long-term with stocks,” Becker said.
What Makes This One Of The Best Mutual Funds?
Strategic Growth is a 2020 IBD Best Mutual Funds Award winner. It won that distinction by topping the S&P 500 in calendar 2019 as well as over the three, five and 10 years ended Dec. 31.
Year to date through Dec. 22, the fund was on track to repeat as an IBD Best Mutual Funds Award winner with a 40.89% return vs. 16.19% for the S&P 500. Its large-cap growth rivals tracked by Morningstar Direct averaged 35.39%.
You can buy A-class shares (GGRAX) with a minimum initial investment of $1,000.
Follow Paul Katzeff on Twitter at @IBD_PKatzeff for tips about retirement planning and active mutual fund managers who consistently outperform the market.
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