- American Century Investments’ senior portfolio manager, Brent Puff, explains the 4-part investing strategy behind the $637m Focused Global Growth Fund providing year-to-date returns of 16.56% vs the benchmark’s 1.76%.
- Puff explains why a potential “blue wave” and a rotation back to value stocks isn’t a concern. And how he is thinking about growth stocks as the economy moves to recovery.
- “We need more growth in the world to really drive that rotation, in my opinion, if we continue to be stuck in a global economy that does not have a lot of positive momentum and is very dependent on government stimulus, I just don’t think those are the preconditions, you need to kind of drive that shift,” Puff said.
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American Century Investments’ $637m Focused Global Growth Fund is crushing its benchmark this year.
But most investors won’t be surprised by that — growth stocks have enjoyed their best year-to-date performance since 1979.
However, the Focused Global Growth Fund has achieved staggering year-to-date total returns of 16.56%, compared to its benchmark MSCI ACWI’s 1.37%, without having many of the pandemic winners, such as Facebook, Zoom and Netflix, within its top 10 holdings.
With an investment split of 69% domestic stock and 31% foreign stock, the top 10 holdings include Amazon, Alibaba and the London Stock Exchange Group.
But even before the dominance of growth stocks, the fund was outperforming its benchmark, providing 3-year average returns of 13.89% compared to the benchmark’s 7.11%.
Senior portfolio manager Brent Puff credits the fund’s winning strategy to being able to identify and exploit two key inefficiencies within the market.
“Number one, the market tends to do a poor job, systematically identifying those turning points or inflection points in the earning cycles of individual businesses,” Puff said. “And number two, it’s our experience and judgment that the market tends to do a poor job extrapolating current operating trends into future earnings around those inflection points.”
The investing approach within the fund is bottom-up, a strategy that has a focus on individual stocks, rather than on macroeconomic and market cycles. The US election next week is not playing a significant role in Puff’s current investing decisions.
“We have not made any dramatic changes to the portfolio as a result of our thoughts on how the election may play out,” Puff said.
However, a “blue wave” is scaring some growth investors.
Democrat policies of a significant infrastructure package, technology regulation and a corporate tax strategy all combined with fiscal stimulus means some experts expect a return to some of the “less loved” value stocks, such as energy, financials and healthcare.
Puff expects growth opportunities to still be available even if there was a rotation back toward value stocks.
“We need more growth in the world to really drive that rotation, in my opinion, if we continue to be stuck in a global economy that does not have a lot of positive momentum and is very dependent on government stimulus, I just don’t think those are the preconditions, you need to kind of drive that shift,” Puff said.
As the election approaches, Puff advises investors to own businesses that will grow sustainably against a material acceleration in the global economy and to look out for excess in the market.
The technology sector probably has the most examples but there is excess everywhere, Puff said.
To manage the risk, Puff has started trimming positioning in businesses he likes but where he believes the valuations are extended. He is then taking profits from those sales and leveraging them toward companies, which have essentially been in the “epi-center” of the pandemic, but when out of the economic trough should experience improving growth, Puff said.
The travel sector is one area Puff has been particularly focused on with this strategy, investing in Heico and Booking Holdings.
“Heico’s real value proposition in the market is they’re selling parts to commercial aircraft owners that basically cost 30 to 50% less than if those same customers bought them directly from OEM manufacturers,” Puff said. “Basically Heico’s value proposition tends to resonate a little more because their customers need to save money. And, so they tend to gain market share during market downturns like the one we’re in.”
Ultimately Puff is concerned most with whether the rate of change of growth is improving and is sustainable, agnostic to whether it’s a traditional value or growth company, a key factor in he believes in the funds continued outperformance.
Puff broke down the fund’s 4-part investing strategy for Business Insider.
4-part investing strategy
“We’re trying to identify leading indicators of individual businesses or industries that suggest to us that growth going forward is going to accelerate from whatever the baseline is today,” Puff said.
“What does the trajectory of earnings look like for this business over the next couple of years,” Puff said.
“Part of our fundamental due diligence on any new idea is going to include an assessment of what we believe at individual business will earn over the next two to three years and what we strive to identify our businesses in which our assessment of earning power, using what we believe is a reasonable set of assumptions based on everything we know about the business leads to earnings estimates that are above current market consensus,” Puff said. “So we want there to be a positive earnings gap.”
Favorable risk reward
“Valuation is a core part of our process, we try very hard to put valuation in context and perspective. And the reason we we do that is we don’t want to be right on the first three elements of our process, and not be in a position to generate trong above market returns, because the valuation of the business is, in our judgement, just excessive relative to what we think the underlying earning power is of the business,” Puff said.