Are you looking for a mutual fund whose investments reflect your values and which also outperforms? Consider one of the best mutual funds, $6.8 billion Putnam Sustainable Leaders Fund (PNOPX).
The fund invests only in stocks that are, as the fund's name suggests, leaders in embracing sustainability practices.
And that focus has not prevented the fund from shining in traditional terms. The fund's total return has a long track record of topping the broad market in the form of the S&P 500 index.
It's been able to do that in part because the portfolio includes market leaders that CAN SLIM investors would recognize. Software titan Microsoft, chipmaker Nvidia and drugmaker Vertex Pharmaceuticals were recent members of the IBD Leaderboard.
Semiconductor gear maker Applied Materials and drugmaker Regeneron Pharmaceutical were some of the fund's recent members of the IBD 50.
Leaderboard is IBD's curated list of leading stocks that stand out for their technical and fundamental prospects. The IBD 50 is IBD's flagship screen of leading growth stocks that show strong relative price strength and top-notch fundamentals.
Sustainable Investing Fund's Smooth Ride
Further, the sustainable investing fund offers a smoother ride to shareholders than the broad market provides. During the three years ended Jan. 31, for every 100% gain notched by the big-cap bogey, the fund advanced 102%, according to Morningstar Direct. But the fund lost just 94% for every 100% drop suffered by the benchmark.
ESG stands for environmental, social and governance. Broadly, environmental is concerned with pollution. Social focuses on such issues as privacy, human rights and labor standards. Governance assesses issues from corporate honesty to whistleblower activities.
By The Numbers: Among The Best Mutual Funds
This sustainable investing growth fund became a 2021 IBD Best Mutual Funds Awards winner by outperforming the S&P 500 in 2020 and in the prior three, five and 10 calendar years.
Its total return in 2021 was 23.25% vs. 28.71% for the S&P 500 and 20.45% for its large-cap growth mutual fund rivals tracked by Morningstar Direct.
The fund outperformed over the three, five and 10 years ended Dec. 31, 2021.
In a conversation with IBD from her home office in Boston, 32-year-old Stephanie Dobson also described how she and co-manager Katherine Collins, head of Putnam's Sustainable Investing, manage the fund overall.
Approach To Sustainable Investing
IBD: Does this fund's approach to ESG investing differ from some other funds' ESG investing strategy?
Stephanie Dobson: One thing that differentiates this fund is its inclusionary approach. We're not screening out ideas that don't fit some third-party ESG criteria or screens. Rather, we look to include fantastic companies that display sustainability leadership that's linked to strong fundamentals and reasonable valuation as well.
IBD: And you look for businesses that embrace sustainable investing value overall, right? In contrast, another fund that you help manage, $582 million Putnam Sustainable Future Fund (PMVAX), looks for stocks with ESG-oriented products or services, correct?
Dobson: In Future Fund, we're looking more at what the company sells or what they do. In Leaders, we focus more on how they operate the business.
IBD: How else would you characterize Sustainable Leaders?
Dobson: Companies must meet four criteria. First, we're focused on materiality. We're looking for sustainability issues that are relevant and matter to financials.
Second, we're looking for proactiveness. Is the company going beyond checking boxes for ESG compliance? Is it aiming to create true sustainability leadership?
Third, we're looking for companies with clear and transparent goals, that track and report their progress.
Fourth, we're looking for companies whose sustainability characteristics have impact beyond their own four walls — on suppliers, customers and competitors.
Helping Make Sustainable Leaders One Of The Best Mutual Funds
IBD: You hold Applied Materials. Is the crux of their sustainability appeal that they facilitate the creation of computer chips, which make life better for people and help companies cut costs and energy usage?
Dobson: Right. Applied Materials makes equipment that enables semiconductor manufacturers to make products that increase efficiency and computing power and help improve the world around them. They touch sustainable themes like renewable energy.
IBD: What about Applied Materials' financial fundamentals?
Dobson: Their leading position in semiconductor capital equipment should continue to benefit from really strong semiconductor demand. That's especially true in less cyclical areas like industrials, autonomous driving and data application.
IBD: Nvidia makes fast-computing chips. Its CUDA software development platform enables developers to access libraries of operating code to build and deploy applications. In turn, that encourages them to use Nvidia chips. It's a virtuous circle, right?
Dobson: Yes, the integration of those software capabilities helps drive accelerated applications development and shifts Nvidia's financial profile in a positive way.
Secondly, its addressable markets are quickly moving beyond traditional strengths in gaming, cryptocurrency and data centers.
New uses include a wide range of artificial intelligence and the omniverse. They include virtual factories and industrial design. Those applications have potential to meaningfully improve customer efficiency.
Nvidia's core sustainability focus focuses on people and technology that move humanity forward in energy efficient computing. It helps contribute to 50% plus annual revenue and earnings growth.
Fast Chips Are Vital To Sustainability
IBD: Speedy computer chips are vital to the emerging processes that you're referring to. ASML Holding is the only manufacturer of chipmaking machines that use extreme ultraviolet light (EUV). Their tiny wavelengths enable creation of chips with very small nodes or transistor gates. The more gates on a chip, the faster its calculations. And everyone knows there is a chip shortage. Is that the thesis for ASML?
Dobson: Yup. These semiconductor-related businesses all have similar themes related to efficiency and effectiveness for customers.
And, yes, demand is strong. Also, ASML leads in environmental goals like decreased energy consumption. That lowers customers' costs and improves efficiency.
Hilton Eyes Environment, Human Trafficking
IBD: OK, something different: Hilton Worldwide. Is this more than a play on a recovering economy?
Dobson: That cyclical element doesn't hurt. But what we love about Hilton is its even-more compelling secular story. It's one of the leading hotel franchise stories. It has strong market share in the U.S. and in properties under development in the U.S.
Hilton has a range of price points across its various brands. It appeals to 100 million travelers. It has a growing room count. Its franchise model drives its recurring cash flow operating model, which needs very little capital expenditure and leads to above-average free cash generation and share repurchase rates.
The market underappreciates the duration of growth and low volatility of this cash flow stream business.
IBD: What are its sustainability strengths?
Dobson: The market underappreciates Hilton's lead in environmental issues. They've developed a measurement system that helps owners measure their footprints. That links to franchisee costs and returns on investment metrics.
Their sustainability issues include energy, laundry, cleaning services and water usage. Hilton has also done work in training employees and tracking for signs of human trafficking.
Apple Helps Make This One Of The Best Mutual Funds
IBD: Is your Apple stake a hardware bet or a software bet?
Dobson: It's increasingly some of both. Also, they've set a goal for making a carbon-neutral product by 2030. Bringing along their vast supply chain, that's very ambitious.
They've been carbon-neutral in their own operations for a couple years.
Also, they fiercely protect data privacy for users. Positions like those have made theirs a very strong ecosystem.
Growth in services means more of Apple's revenues are moving toward a recurring basis. That's not necessarily reflected in their valuation. The stock is close to a 4% free cash flow yield as that mix shift (between hardware and services) continues.
Home Depot's Return On Invested Capital
IBD: What are the traditional financial and ESG appeals of Home Depot?
Dobson: First of all, it dominates the home improvement space. And Home Depot has high return on invested capital. That means strong free cash flow generation, since they're not increasing their number of stores as fast as they used to.
Their sustainability practices include sharing profits with associates. HD views them as key customer contact points. And HD promotes from within.
Roughly speaking, the do-it-yourself business grew faster than contractor business in year one of the pandemic. Currently, the pro-business is growing faster than the DIY business.
IBD: Why do you like industrial gas manufacturer Linde?
Dobson: They help customers run their businesses and operate more efficiently. A big part of their business is providing on-site industrial gasses. They have long-term contracts that are vital to customers. I like that type of business.
Their solutions help customers reduce emissions. They provide lifesaving oxygen to hospitals, special gasses for electronics manufacturers, hydrogen for clean fuel.
And they continue to capture the tail end of benefits from their merger with Praxair (which was approved by the Federal Trade Commission in 2018). They have more secular growth than in the past. And more than investors perhaps appreciate.
Follow Paul Katzeff on Twitter at @IBD_PKatzeff for tips about retirement planning and actively run portfolios that consistently outperform and rank among the best mutual funds.
