Stock picking is the hallmark of top mutual fund T. Rowe Price U.S. Equity Research Fund (PRCOX).
But what makes this top stock mutual fund unique is that it's not the fund managers who pick the stocks that make it into the portfolio. It's T. Rowe Price's stock analysts, says Ann Holcomb, a co-portfolio manager for the fund.
These are the experts in a specific sliver of the stock market. That might be a sector or specific industry group. These pros zero in on the stocks in their respective universes poised to outperform.
T. Rowe Price U.S. Equity Research Fund may have 30 different analysts managing a different slice of the portfolio at any time.
Winning Approach Of Top Mutual Fund
This approach to portfolio building has served investors well. The $12.4 billion fund, a 2024 IBD Best Mutual Funds Awards winner, has been a performance powerhouse. The fund has topped the benchmark S&P 500 stock index (which IBD uses to rank U.S. stock funds) in the past one-, three-, -five- and 10-year periods.
In the past 10 years, this top fund has posted an annualized gain of 14%, topping the S&P 500's 13.38% gain. And T. Rowe Price U.S. Equity Research Fund is out in front of the market again in 2024. The fund's year-to-date gain of 21.87% through Oct. 2 is outpacing the S&P 500 by a full percentage point.
Holcomb says the analysts-turned-stock pickers distinguish this portfolio from other mutual funds.
"They are picking the stocks, making the buy-and-sell decisions, and actually calling the trading desk with their trades," Holcomb told IBD.
Benefits Of Allowing Analysts To Trade
IBD: What are the benefits of this analyst-driven approach?
Ann Holcomb: It helps to neutralize a lot of the style biases that could be inherent in a portfolio that is managed by one portfolio manager. In addition to asking each analyst to make those buy-and-sell decisions within their specific area of expertise, they are asked to prioritize the names within that sleeve.
IBD: How does the fund manage sector weights and control risk?
Holcomb: We keep the sector and industry weights in the portfolio close to the benchmark. We also have limits on individual position sizes. So, while we're not taking a lot of active risk in the portfolio, we think that really helps to contribute to the consistency of performance over time.
Finding Best Ideas
IBD: This fund is about the best ideas and beating the market, right?
Holcomb: I've been involved with this portfolio since its inception. I did some of the back testing work. And what we wanted to test was if we did really focus the portfolio on our analyst buy-rated names, making small overweight positions in those names, could that give us consistent relative performance over the index, over time? The basic premise is for us to really focus on those names that our analysts have identified as long-term winners.
IBD: What other ways do analysts add value?
Holcomb: The analyst's job is to figure out what are the (key stock outperformance) traits within their own area of expertise. What's unique is we are able to leverage the insights across about 30 individuals. What is common as you look across the holdings of the portfolio is that they are high-priority, high-conviction names. The analysts typically come to these investment decisions their own way. So, part of what our analysts must do is to really determine what factors work best within their space.
Top Mutual Fund Competes For Best Stocks
IBD: Does competition among analysts to come up with the best performers boost performance?
Holcomb: Absolutely. Our analysts really feel that pride in managing client assets. Some sleeves of this portfolio can be multiple billions of dollars that an analyst is managing.
IBD: What role do you and the other fund managers play?
Holcomb: The portfolio management team, which is comprised of the three directors of research, function as more of a risk manager. We're overseeing things at the total portfolio level. We're also looking for consistency between what the analysts are doing in this portfolio and how they're recommending these stocks to our broader suite of portfolios. We are really functioning in an oversight capacity.
Favorite Stocks Now
IBD: What stocks does your analyst team like now?
Holcomb: To reiterate, the overall benefit of the strategy is that its overall characteristics and sector weights are similar to the market. But then within the sub-portfolios, we will have our analysts tilt toward different themes or idiosyncratic stories that their fundamental research indicates will be winners over time.
IBD: What are some future winners they envision?
Holcomb: One theme we like right now and continue to be overweight in is the GLP-1s (weight-loss drugs). That's not a new story. It's not a short story, either. In our view, there's still a long runway ahead.
Profitable Themes Important To Top Mutual Fund
IBD: What's the investment thesis and who are the likely obesity-drug winners?
Holcomb: The analyst believes that the duration (of the weigh-loss drug trend) is going to continue. He believes we will see more and more health benefits uncovered. And (drugmakers) are going to introduce an oral form, which increases the potential market over time as well as increasing revenues and the companies' earnings power.
We continue to have overweights in both Eli Lilly and (Denmark-based) Novo Nordisk. Novo Nordisk is an interesting one to highlight.
IBD: Why is that?
Holcomb: Novo is not in the S&P 500. And a decent number of names in our portfolio are not in the S&P 500. So, if you're thinking about a portfolio that is benchmarked against the S&P 500 and is designed to outperform, it allows analysts to uncover ideas or names outside the index that are just better investments than maybe competitors within the index.
Top Mutual Fund Betting On The Consumer
IBD: What other investment trends are T. Rowe Price analysts buying into?
Holcomb: Within consumer, we like differentiated concepts like Chipotle, (a Mexican restaurant chain), and (chicken wing restaurant chain) Wingstop.
IBD: Materials have been perking up; any picks in that sector?
Holcomb: We look at quality compounders through a cycle, like Roper Technologies. (Roper is an industrial company selling products that include business software, medical devices, employee in-building badge card readers and meter readers.) So, with Roper, there is attractive valuation despite a meaningful increase in portfolio quality and a decrease in its cyclicality over time. Our analyst does see improving organic growth.
Trucking On Gains
IBD: What other stocks does your team like?
Holcomb: I'll give you another industrial. Old Dominion Freight Line. It's a premier trucking name that has continued to gain market share, which has led to margin improvement over time. It has a best-in-class management team. We think that they'll continue to take market share due to premium product offerings and add-on features a customer might need.
IBD: Let's talk about the Magnificent Seven, as all of those stocks are in your top-10 holdings.
Holcomb: We did lighten up a little bit (since the end of June). The momentum trade seemed a little long in the tooth to us. And it seemed prudent to reduce just a little bit of our holdings. But as a group, we still are overweight. And AI-related names, Nvidia in particular, was the top contributor to our relative performance over the past year. In the analyst's mind it was prudent to reduce some of that Nvidia overweight and redeploy across other names within his sleeve of the portfolio.
What Top Mutual Fund Worries About
IBD: Seems like the market has many worries now: the election, overseas wars and a port workers strike.
Holcomb: There's very little doubt, honestly, that there's going to be market volatility. But there are opportunities that present themselves around those risks you cited, as well. We could get an opportunity to upgrade our holdings. And that is one of the reasons why we focus on fundamental research and understanding, given our long-term time frame, what the potentially successful investments are over time.
IBD: So, you have a buy list and upgrade list to buy on weakness?
Holcomb: (It's key) to have those at the ready when volatility does pick up. We look at markets that have volatility as great opportunities for us. If you look historically at our relative performance, we typically do very well in those markets. You wouldn't see full-scale (portfolio) rotation, but you would see some moves throughout the portfolio as we see opportunities present themselves.
Where Are The Opportunities?
IBD: Any parts of the market you see opportunity in as the Fed starts its rate-cut cycle?
Holcomb: We should see more opportunities within the industrial sector, particularly if we do have this soft-landing environment. The industrials have been laggards. So, we think that would be a place where we could see some interesting opportunities, and we've talked about some stocks we like in that sector.
We've heard from many companies that they've seen some slowdown in the consumer. So, we could see support (from lower borrowing costs) for some of the consumer-oriented names as well.
IBD: Any other stocks with upside potential you like?
Holcomb: On the defense side, I would highlight L3Harris, which is a defense contractor. They have a strong organic revenue growth profile and margins, and they also have an attractive valuation. So that's one that we have been pretty positive on as well.
Playing Defense With Top Mutual Fund
IBD: With many wars around the world, defense stocks are receiving more investor attention.
Holcomb: You're absolutely right. I would also like to mention that GE Aerospace is attractive in the defense space as well. (GE Aerospace makes engines and propellers for military aircraft and vessels, flight control systems, and nonexplosive parts for weapons systems.)
IBD: Indexing has been all the rage, but stock picking isn't dead, is it?
Holcomb: The beauty of the construct of T. Rowe Price U.S. Equity Research over time is you get the benefits of stock picking, but you also get the guardrails of sector and style neutrality. So, you get a little bit more than the market return, but not that much more risk. And that can compound nicely over time.
