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Business Insider spoke with the eight best-performing large-cap fund managers of the year, based on a trailing one-year basis through the end of October 2018.
The fund managers outlined which thematic and single-stock strategies paid off for them this year, and laid out their top trades and ideas for 2019.
In 2018 the stock market rediscovered volatility.
After 2017 saw traditional measures of price swings locked at record lows, swift market gyrations were again the status quo.
For those observing this price action at ground level, it was a tumultuous whirlwind, marked by two separate corrections that came months apart.
But for a select group of money managers, 2018 was a year for the ages. Some of them saw turbulence coming and planned accordingly, while some employed long-term strategies that insulated them from temporary shocks.
Business Insider spoke with the eight best-performing large-cap fund managers of 2018, as ranked by Kiplinger. They shared the secrets behind their success and offered outlooks and stock picks for 2019.
Presented below are the results of our discussions with these investing heavyweights, who broke down their methodologies, what they did right, and what their attack plan is going forward.
The managers are arranged in decreasing order of trailing one-year return, through October 31.Nancy Zevenbergen, founder and portfolio manager of the Zevenbergen Growth Fund (SAGAX)
Nancy Zevenbergen and a team of portfolio managers run the $113.6 million Zevenbergen Growth Fund.
She looks for firms like the one she started in 1987: those still run by founders who have long-term visions and stakes in their companies, versus rent-a-CEO setups.
That's why a company like Tesla remained attractive even after CEO Elon Musk created off-putting headlines. The electric-car maker's brand identity is tightly linked to Musk, and his continued involvement with the company is arguably a key reason for its success.
But at Zevenbergen it's not just about personalities. The most important thing that her fund considers in a company's financial statements is its revenue growth. That's because it provides a clearer picture of pricing, consumer demand, and the opportunities for capturing market share. A 15% growth rate is the fund's typical threshold.
She's also on the lookout for secular growth opportunities, which explains why her fund profited the most this year from Tilray, the Canadian cannabis producer.
1-year return: 26.54%
Biggest holdings (as of 9/30): Amazon (6.5%), Exact Sciences (5.4%), Netflix (5.4%), Shopify (4.7%), XPO Logistics (4.4%)
What worked in 2018:
"We believe that every market that eventually moves toward legal adult use will start in the medical realm," said Joseph Dennison, a portfolio manager on Zevenbergen's team. "We found opportunities to both add to and take profits in our positions.
"[Okta] is run by two Salesforce.com alums, so they know how to sell to the enterprise [customer]," Anthony Zackery, a portfolio manager, said.
He added: "They only have 3% to 5% market share of probably a $40 billion to 50 billion overall market worldwide, and they've been growing very healthily on the topline."
What's ahead in 2019:
"We see a continued separation of companies that have clear, understandable secular drivers and who are making the investments necessary to continue driving their growth versus those who have benefited solely from strong economies, financial engineering, and tax reform," Dennison said.
Dennis Lynch, lead manager of Morgan Stanley's Multi Cap Growth Fund (CPOAX) and Institutional Growth Portfolio (MSEGX)
Any follower of fund-manager rankings from the past few years should be familiar with Dennis Lynch.
As head of growth investing at Morgan Stanley Investment Management — where he serves as lead manager of six funds and directly oversees $27 billion — Lynch has been one of the list's foremost stalwarts. And what's really remarkable is that he has two funds in Kiplinger's trailing-one-year top 10.
At the center of Lynch's investment strategy is a long-term approach that involves identifying "platform businesses" that have enormous growth potential over a handful of years. That led him to buy his first shares in Amazon more than 13 years ago, an investment that's paid off majorly.
Ultimately, Lynch doesn't trouble himself with daily market fluctuations and tries to steer clear of stocks closely linked to macroeconomic uncertainty.
As for how his funds withstood the turbulence in February and October, Lynch attributes that to his desire to achieve diversification around different end markets and end-market demand.
1-year return: 24.13% (CPOAX), 17.09% (MSEGX)
Biggest holdings (as of 9/30):
CPOAX — Amazon (9.2%), Veeva Systems (5.9%), Illumina (5.6%), Coupa Software (5.2%), Union Pacific (5.1%)
MSEGX — Amazon (9.7%), Veeva Systems (6.5%), Illumina (6%), Salesforce.com (5.4%), Union Pacific (5.3%)
What worked in 2018:
"Generally speaking, companies that pursue software-as-a-service [SaaS] have generally been performing very well. The fundamental results for these companies, and their outlooks, have been strong.
"In addition, because SaaS is a pretty destructive source for software companies that sell to businesses of all sizes, you’re seeing some M&A, because some of those companies have strategic value. There’s no question that one driver for us has been companies that pursue that type of strategy.
"Generally speaking, some areas within healthcare IT that sell into end markets driven by healthcare spending have performed pretty well.
"Beyond that, you’ve also had some outperformance in companies that use the internet to try and create solutions and services for consumers and businesses. They’re using the internet as a disruptive platform, or a way to disrupt existing business models."
What's ahead in 2019:
"Generally, we still favor the same themes. Overall, we still like companies that benefit from those same trends.
"I can’t say we see some new big trend we’re super focused on. It’s more an extension of these existing ideas and our belief that many existing holdings can be even bigger companies in the future.
"We’re watching a lot of the political back-and-forth. We try to be very careful about not having strong opinions about interest-rate movements or the economy, because we don’t want every one of our positions to reflect one overall view that we think is fairly unpredictable."
Chris Smith, founding portfolio manager of the Artisan Thematic Fund (ARTTX)
Chris Smith oversees more than $500 million as the founding portfolio manager of the Artisan Thematic Fund.
Smith works to identify industries undergoing multiyear inflection points, then makes investments based on those trends. Themes from the past year included data monetization, cash-flow inflection, and video games, among others.
He achieves diversification by digging in on each of these identified themes and making portfolio selections that offer earnings power on a two- to five-year basis. He doesn't own every company involved in a theme, just the very best, based on his models.
Smith also looks for stocks that carry high return on invested capital. He says that a company's ROIC has historically been the biggest driver of its multiple.
Lastly, it's important to mention that the Artisan Thematic Fund occasionally uses options to express investment ideas, a practice not regularly employed by fund managers. Smith says that those derivative contracts are used for both directional bets and downside protection. He says hedges in the portfolio kept his fund from getting hurt as badly during market downturns this year.
1-year return: 23.26%
Biggest holdings (as of 9/30): Equinix (6.2%), Treasury bill/bonds (5.1%), IHS Markit (4.9%), CME Group (4.8%), SBA Communications (4.4%)
What worked in 2018:
"Our names are very diversified in terms of our performance this year. Harris Corp. was one of our top five biggest winners on the defense team. We had a video-game theme that we expressed through Nintendo. We’ve since exited that position, but it was one of our top five winners.
"There’s our cash-flow-inflection theme, for which Lamb Weston was our largest winner on the year. That was another unique idea.
"In software, we owned Salesforce, which we’ve exited, but it was one of our big winners of the year.
"Primary themes this year were: software, cash-flow inflection, data monetization, video games, and defense. One name from each of those groups were our top five winners."
What's ahead in 2019:
"Our overall view is that economic growth peaked this year and has started to slow, and that slowing is more pronounced globally. That should continue through next year. At some point, by probably the end of next year, we might enter a recession, but that's difficult to call.
"What that's leading us to do is build a portfolio built on higher-quality, stable businesses that work better for the later cycle. And we're focusing on themes that are less economically sensitive than may have been in the portfolio historically.
"One area we like are the tower companies in the US. We like SBA Communications (SBAC), American Tower (AMT), Crown Castle (CCI). They're very high-recurring, long-term revenue-stream companies, and they own all the wireless towers in the US.
"Life-science companies — which are exposed to accelerating secular tailwinds in biopharma and precision medicine — are not as economically sensitive either. They include companies like Thermo Fisher (TMO) and Perk and Elmer (PKI) that we think are accelerating on the innovation scale over the next few years, and should be reasonably resilient in an economic slowdown."
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