by Mike Schnitzel.
The Lipper Large-Cap Growth Funds classification encompasses funds that, by portfolio practice, invest at least 75% of their equity assets in companies with market capitalizations (on a three-year weighted basis) above Lipper’s U.S. Diversified Equity Funds large-cap floor. Large-cap growth funds typically have above-average characteristics compared to the S&P 500 Index.
The Lipper Leaders Rating System is a toolkit that helps guide investors and their advisors in selecting funds that suit individual investment styles and goals. According to LSEG Lipper, “Each fund is ranked against its peers based on the metric used (such as its flagship risk-adjusted return measure, Consistent Return, Total Return, or Expense), and the highest 20% of funds in each peer group are named Lipper Leaders, the next 20% receive a rating of 4, the middle 20% are rated 3, the next 20% are rated 2, and the lowest 20% are rated 1.”
One of the best Lipper Large-Cap Growth Funds according to Lipper Leader metrics is the American Century Ultra Fund, Investor Class (TWCUX). The fund has a 5 in Consistent Return for the three-year period and has beaten its Russell 1000 Growth Index benchmark year to date and over 10 years. Ultra Fund Senior Client Portfolio Manager Kevin Lewis spoke about his outlook on large-cap funds, risk management, and the strategies used by Ultra’s management team to provide investors with less volatile risk-adjusted returns.
Finding good, profitable businesses
First and foremost, Ultra’s management team looks for good businesses with a competitive advantage to add to its portfolio. Lewis said that competitive advantage could be superior management, a better business model, better product or service, or any combination of the three.
“We want to know why companies deliver a higher profitability profile than their peers. We want to talk to management to understand how they are reallocating capital to expand the business,” Lewis said. Investments such as expanding a geographical footprint or new products can help achieve the growth and scale that improves the economic profile of the business.
Team approach, stock selection, lead to consistent returns
Lewis said that Ultra’s management team has the breadth and depth to be a cornerstone of its success. One portfolio manager is a chemist who has the expertise to understand the product pipeline and the process of getting drugs to market when analyzing investment opportunities in the healthcare sector. Other team members include a former CPA who can explain to the team the implications of a company switching its accounting standards, and a dedicated risk management analyst.
“Every decision we make is formed on what is the sustainable growth of the company, the valuation of the company—and if we add or remove capital to this company—what does this add or take away capital from a company?” Lewis said. One important factor is that all investment decisions are voted on by the team’s portfolio managers and analysts before a decision is made.
“We believe collective decisions are very well informed by unique industry practitioner experience and other key skill sets on the team,” Lewis said.
Another component driving returns is Ultra’s focus on very high-quality companies. The management team defines quality by profitability—companies that are positioned to grow at an above average rate into the future. This, in turn, should lead to wealth creation in the stock as it compounds at an above average rate, Lewis said. “This notion of quality has been academically tested and we’ve tested it in the real world with the decade-plus we’ve been managing Ultra.”
Lewis said Ultra’s management team likes to emphasize its fundamental research and stock selection, plus an avoidance of market timing of cash to be style pure, as another important part of generating consistent returns in its portfolio. “We are going to be within 500 basis points of the benchmark, and we do not time cash. We stay fairly fully invested,” he said. “We are trying to stay style pure—we’re a large-cap U.S. growth fund emphasizing fundamental research.”
Valuation and risk management
Lewis explained that valuation is an integral part of how Ultra is managed. As part of the fund’s fundamental research, financial models are developed looking at a company’s cash flow over the next five to 10 years to help the portfolio managers’ understanding of intrinsic value, he said. Ultra’s managers then compare the stock price to the intrinsic value to determine the opportunity upside versus opportunity downside.
The existence of a dedicated risk management analyst is the key to Ultra’s approach to risk management. Another emphasis is on diversity—Ultra’s portfolio is composed of 60 to 90 well diversified positions, Lewis said. Stock selection and fundamental research help to mitigate risk within Ultra’s portfolio. “We make sure we are not overly dependent on a single company,” Lewis said. “Also, we are investors—not traders.” He said the fund’s portfolio turnover is less than 20% each year.
Offering diverse large-cap exposure
Ultra strives to maintain diversification and a style-pure approach to managing a U.S. large-cap growth fund, Lewis said. “We take that responsibility to be positioned like that in a portfolio seriously. We are not going to betray our mandate to be a value investor,” he said. “We will help investors fulfill their diversified style lineup.”
Lewis said that in addition to helping provide diversification to mitigate risk, Ultra’s management style is geared toward investors with a longer-term investment horizon similar to the investing philosophy of the management team. “We are ideally equipped to assist them with that journey,” he said.
Investors flee large caps
Investors have been leaving Large-Cap Growth Funds in droves, at least when it comes to traditional mutual funds. The classification has seen $1.38 billion head out the door in July, and $20.55 billion year to date. Large-Cap Growth Funds have seen outflows each of the past five years—$20.31 billion in outflows in 2022, $23.79 billion in 2021, $18.49 billion in 2020, $26.07 billion in 2019, and $13.18 billion in 2018. According to my colleague, Head of Global Research Tom Roseen, the outflows are a result of baby boomer diversification.
“It’s really all about baby boomers migrating out of their core and satellite holdings and into other asset classes: fixed income, small-cap, commodities, REITs, and all the stuff they didn’t have over the years, not to mention drawdowns in retirement and moving to low-cost ETFs in the same space,” he said.
Large-Cap Growth Funds have, however, been taking in money through the vehicle of exchange-traded funds. Year-to-date flows for Large-Cap Growth ETFs are $6.76 billion as of the end of July. Unlike their conventional mutual fund brethren, the past five years have been highlighted by inflows—$28 billion in 2022, $30 billion in 2021, $21.39 billion in 2020, $5.89 billion in 2019, and $15.55 billion in 2018.
Roseen said investors are favoring ETFs over mutual funds in this classification because it is the low-cost option for what some perceive as an attractive asset class. “The large-cap growth play is a little bit of FOMO along with good old research that got them there in the first place: strong balance sheets, strong stats, and strong growth opportunities,” he said. “These are the typical stock plays people are looking for in their core asset allocation goals—hopefully steady returns with lower volatility than say small-cap funds.”