How Three Strong-Performing Funds Pick Stocks

Many stock-picking styles have sizzled lately, with growth and value and domestic and international investing all toting up gains. Three of the better-performing mutual funds of recent months found their winners among small- and large-cap growth stocks and Chinese shares.

Hood River Small-Cap Growth Fund

The managers of the Hood River Small-Cap Growth Fund — Robert C. Marvin, Brian P. Smoluch and David G. Swank — say they prefer to sleuth among small caps because they are monitored less widely than giants like Apple and Amazon.

“Our typical company might have only six analysts following it, compared to maybe 50 for Apple,” Mr. Smoluch said. The Hood River managers say there is a “research gap” that they can fill, thanks to their 20 years of work with small caps.

The three met in the 1990s while working at what was then Columbia Management in Portland, Ore. In the early 2000s, Mr. Smoluch and Mr. Marvin created a predecessor to their fund at Roxbury Capital Management. A few years later, they recruited Mr. Swank, and, in 2013, the three started Hood River Capital Management, also in Portland.

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As stock pickers, they’re generalists, surveying all parts of the market. They will scoop up several companies in a field if they see growing companies benefiting from a broader trend. They have done that in fiber optics, with holdings like Oclaro, Fabrinet and Finisar, all recent double-digit gainers.

“For a while, there was a huge overcapacity of components for fiber networks,” Mr. Smoluch said. “But you’ve had a major industry consolidation combined with accelerating demand,” as networks upgrade to meet the bandwidth needs of smartphones, cloud computing and video streaming.

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In researching a promising company, they talk with its competitors, customers and suppliers. They estimate they make about 1,000 calls a year. Talks with pharmaceutical and biotech executives led them to a holding in PRA Health Sciences.

“It’s a contract research organization that manages clinical trials,” Mr. Swank said. “Based on our conversations, we believe it’s gaining market share, and the entire industry is being helped along by the high level of biotech financing that happened in 2015.”

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The institutional shares of the Hood River fund, with an expense ratio of 1.09 percent, returned 15.01 percent in the third quarter, compared with 3.85 percent for the Standard Poor’s 500-stock index.

Fidelity OTC Portfolio

Gavin S. Baker, manager of the Fidelity OTC Portfolio, invests in growth companies, too. But to fill his fund, which contains 174 stocks and $13.6 billion in assets, he leans to large caps. The biggest components of the index are tech stalwarts like Apple, Alphabet, Microsoft and Amazon.

Mr. Baker builds his portfolio around themes that he sees shaping technology and the economy, like the emergence of artificial intelligence, and seeks stocks with strategies that will play out over three to seven years. Market attention tends to be short-term, creating opportunities for people who can be more patient, he said.

He has long held Amazon shares, for example, even as other investors have said they are overvalued, based on the price-earnings ratio.

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“Amazon has gone, over the last 15 years, from $5 to $840,” he said. “At some point, you’d think people would wear down and realize that looking at it on current-period earnings isn’t the right way to think about it.”

As for artificial intelligence, the theme enters his portfolio through stocks like Alphabet and Tesla. Mr. Baker says he sees self-driving cars as an eventual safety boon, despite current problems.

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“More than a million people die every year driving,” he said. “Self-driving cars will never drive drunk or high or distracted. They won’t be texting and driving.”

Artificial intelligence favors the biggest tech companies, he said, because it demands lots of data and cheap, powerful computing, both of which they have in abundance.

Mr. Baker has managed his fund since 2009, and over the last five years, it has been one of the top performers among large-cap growth funds, returning an annualized average of 18.53 percent. In the third quarter, it returned 11.89 percent. The fund has an expense ratio of 0.91 percent.

Matthews China Fund

Andrew V. Mattock, lead portfolio manager of the Matthews China Fund, also invests in companies aiming to grow at faster than average rates — but his stocks all do business in China. Mr. Mattock took the job a little more than a year ago. He had previously worked as an Asia manager, based in Singapore, for Henderson Global Investors.

The fund holds only 36 stocks, a deliberately focused selection, he said. “You have to choose between the last two to get down to the one you really like,” he said.

For several years, worrisome economic news has streamed from China — reports of a slowing economy, overheated real estate markets and banks fat with problem loans. Mr. Mattock said such macro scares have buffeted China portfolios, on and off, for the roughly 15 years he has been investing in the country.

But the “obsession with macro,” he said, has overshadowed a continued maturation of Chinese companies that offers opportunities for committed investors. “We have a lot of the big industry leaders in the portfolio, and these macro stories meant I could pick them up at a very good price,” he said.

In insurance, for example, the fund owns Ping An and China Life, two of the country’s biggest insurers. In e-commerce, it holds Alibaba and Vipshop Holdings. Alibaba and Vipshop are leading e-commerce companies.

The Matthews fund, with an expense ratio of 1.14 percent, returned 14.95 percent in the third quarter.

Correction: October 15, 2016

An earlier version of this article misstated the expense ratio for the institutional shares of the Hood River Small-Cap Growth Fund. It was 1.09 percent, a net figure that accounts for fee waivers and expense reimbursements by the fund company, not 1.49 percent, which is the gross expense ratio.

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Article source: http://www.nytimes.com/2016/10/16/business/mutfund/how-three-strong-performing-funds-pick-stocks.html?partner=rss&emc=rss