By Shara Tibken Of DOW JONES NEWSWIRES
NEW YORK (Dow Jones)–Industry experience–and a focus on buying “good businesses”–has pushed the American Century Ultra Investment Fund (TWCUX) to outperform the market and stand out from its peers.
The fund, co-managed by Keith Lee and Michael Li, focuses on owning large-cap companies with long runways for growth. It benefits from Lee’s engineering background, as well as Li’s PhD in chemistry and time at drug maker Bristol-Myers Squibb Co. (BMY).
“We have industry experience that lends to being able to add more insights and perspectives on the companies we invest in,” Lee said.
The fund has outperformed the broader market over the past several years. It’s up 5.00% over the past year through Tuesday, topping the S&P 500 by 0.78 percentage point, according to Morningstar. The fund has delivered annualized returns of 21.65% over the past three years, outpacing the S&P 500 by 2.41 percentage points.
“The fund stands out for its strong track record, investment in companies with strong balance sheets and strong cash flow generation, and its low expense ratio,” said Todd Rosenbluth, a mutual fund analyst with S&P Capital IQ.
He added the turnover rate is about 13%, well below similar funds.
“Our holding period tends to be pretty long compared to our peers,” Li said. “The bar to get into the portfolio is very, very high, so once a stock gets in the portfolio, we tend to hold it for the long term.”
The managers examine several factors to narrow down the field of large-cap growth stocks, including looking for companies with “superior” accelerating earnings or a clear path to profitability. They also look for companies with the ability to scale to new businesses and geographies, and with a lot of capital to invest in their operations.
In addition, the managers take into account valuation and share price momentum.
“The foundation of how we think about everything is we invest in good businesses,” Lee said.
The managers then use a proprietary model for screening and spend time researching the different stocks. They meet with management, identify competitive advantages and look for attractive risk-rewards. They also make sure the fund, which holds a total of 80 to 100 names, is well balanced for growth and contains “intended risks.”
The managers sell stocks when the thesis changes, such as slowing growth rates or if they can’t justify the valuation.
One of the firm’s top picks is Gilead Sciences Inc. (GILD). The company makes drugs to treat HIV, but there have been worries about the eventual expiration of some patents.
Li believes “people have really underestimated the potential for the HIV growth opportunity, and people have overestimated the patent risk to the HIV franchise.”
He said the company’s efforts to develop an HIV treatment that combines four pills into one is promising, and Gilead also is in the process of buying Pharmasset Inc. (VRUS), which is developing new treatments for hepatitis C infections.
“We really like Gilead for the reasons it’s been misperceived by investors,” Li said. “We feel there’s a lot of value in this franchise.”
The fund also is heavily invested in the technology sector, with Apple Inc. (AAPL) its largest holding. The managers bought shares during a stock dip amid worries about the health of founder and CEO Steve Jobs.
“We felt as important and creative as Steve Jobs was, he created a very strong bench and a strong management team,” Lee said.
He added that Apple’s growth rates are “stunning,” and it benefits from the strong combination of hardware, software and application ecosystem.
Another top tech pick for the managers is Broadcom Corp. (BRCM), which makes chips for mobile devices, networking and other products. Lee said the fund had been eyeing Broadcom for a long time, but couldn’t justify its valuation. When the stock dipped along with the rest of the semiconductor sector, the fund used that as the chance to build a position.
“It has a diversified business model, it’s always a market leader, and over time, it’s gotten even stronger,” Lee said.
-By Shara Tibken, Dow Jones Newswires; 212-416-2189; shara.tibken@dowjones.com
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