In a market where a few good stocks can make a portfolio manager look good, Steven Barry lets about 125 stocks beat the market consistently and do the bragging for his best mutual fund.
"No one stock is going to decide whether we win or lose," said Barry, manager of Goldman Sachs Flexible Cap fund (GILLX).
Team Of Winning Stocks In A Best Mutual Fund
If Barry was a head coach of a pro sports team, his record wouldn't be determined by the performance of one star player. A "my way or the highway" leadership style isn't his plan either.
Goldman Sachs Flexible Cap isn't a 2023 IBD Best Mutual Fund winner because of one winning stock or one stock picker making risky bets.
The fund has beaten the S&P 500 for the past one-, three-, five- and 10-year periods, according to Morningstar, with a disciplined team approach.
The $75.7 million fund's success, Barry says, is due to a unique strategy that relies on four different specialty areas at Goldman Sachs. The fund's stock-picking team starts by identifying high-quality businesses with sustainable growth prospects, strong franchises and top management teams. The quantitative team then runs the numbers to evaluate qualities such as quality, valuation and volatility.
Meanwhile, risk management experts check the portfolio's construction. They make sure it doesn't add any unintended risks, such as having too many stocks that behave the same way. Finally, the engineering team utilizes tech-based tools to confirm the fund's risks. The team determines if risks are understood and worth it.
"It's very hard to beat the S&P 500, and everyone tries to do it in their own unique way," said Barry. "What makes this strategy so successful is that it brings together four core disciplines that work not in silos, but in a collaborative way. It's a great compounding strategy."
Keeping Flexibility At The Core For Best Mutual Fund
The key word in the best mutual fund's name is flexible. It owns more than just growth stocks and value stocks. Nor does it make tremendous sector bets or try to size holdings simply by market cap like the S&P 500 does. While the fund owns all the "Magnificent Seven" megacap stocks, Barry says it is underweight Facebook parent Meta Platforms, Tesla and Apple.
Despite owning smaller helpings of these popular stocks than the broad market benchmark, the fund has gained 16.1% year-to-date through Nov. 3, outpacing the S&P 500 by a full percentage point.
"The strategy takes low absolute risk relative to the benchmark," said Barry.
Put Quality First
Goldman Sachs Flexible Cap employs a so-called "style neutral" approach that allows it to target the types of quality stocks that it's looking for no matter where they fit into Morningstar's style box.
"We're trying to find businesses that aren't going to win merely because they're a value stock or growth stock," said Barry. "We have a nice distribution of all those types of stocks which has allowed us to outperform. It gets back to the core of identifying the high-quality, durable franchises and building a very balanced, diversified portfolio."
So, what stocks in the portfolio does Barry like now?
Despite recent weakness in financials, due in part to concerns that higher borrowing costs could cause consumers to experience credit problems, Barry likes quality financials such as JPMorgan Chase, American Express and Visa.
Barry likes credit card processor Visa, which is a top-10 holding, because its business model has no credit risk. "It's just a steady compounder and an enabler of commerce," said Barry.
Best Mutual Fund: Jumping Into Health Care
He also sees value in health care stocks, such as Eli Lilly, which has found success with its diabetes drug Mounjaro that is also used as a weight-loss drug. He also likes Zimmer Biomet, an orthopedic device company whose products are used for knee, hip and other joint replacements. The stock has sold off amid fears that new diabetes drugs used as weight-loss treatments will result in fewer obese people and less need in the future for joint replacements.
"Zimmer is executing very well and gaining share in the orthopedic device area," said Barry. "But the market has become very concerned that its future growth rate is going to decelerate sharply. We disagree."
Opportunities In Tech And Beyond
In the tech space, Barry is bullish on cybersecurity leader Palo Alto Networks and Marvell Technology, a maker of networking chips that is seeing increased revenue potential for its AI products.
Paint manufacturer Sherwin-Williams, a high-quality company that has been hurt by the slowdown in housing sales and higher prices for raw materials, is seen as a good stock to own heading into 2024, Barry adds.
Following The Consumer At A Best Mutual Fund
The outlook for stocks, Barry says, will be driven by interest rates and the health of the U.S. consumer, who accounts for two-thirds of economic growth.
"One of the most important things for an investor to understand is what 5% interest rates means for the companies you own and the economy," said Barry. "We're just starting to see the impact of higher rates on the economy. Five percent interest rates are going to create massive dislocations as well as opportunities. We look forward to understanding and anticipating those things. We think to win in this market you have to do that."
And when it comes to consumers' ability to keep spending and avoiding credit issues due to higher debt levels, Barry says there are statistics that point to both a bullish and bearish outcome.
As a result, Barry says his fund doesn't want to get too negative or too optimistic on the consumer. "We want to play right down the middle of the fairway rather than make extreme bets," he said.
