Which Leading Stocks Help This Top Mutual Fund Outperform?

Despite its name and a big 41% weighting in tech stocks, AllianzGI Focused Growth Fund (PGWAX) does not aim to focus assets in any one sector. Its tech stock stake at its last count on Oct. 31 came by way of  stock-by-stock analysis at the $1.1 billion fund.

X Focused Growth’s next biggest sector weighting was 16% in consumer cyclical stocks. The concentration has worked well for the fund’s investors. In the past year going into Thursday, the fund gained 33.11%, topping 78% of its large-cap growth rivals tracked by Morningstar. It outperformed 82% of its peers over the past three years with a 15.31% average annual gain. The S&P 500 averaged 23.57% and 12.70% in those time spans.

The fund aims for long-term price gains by seeking stocks of what lead fund manager Karen Hiatt calls high-quality companies that she and co-manager Raphael Edelman believe can sustain growth and post earnings surprises as well as generate attractive cash flows. “We look for companies with strong management, that have a track record of building shareholder value and delivering strong free cash flow,” Hiatt said.

To achieve that, Hiatt and Edelman invest in only their best ideas. The portfolio held just 39 stocks as of Nov. 30. The managers also focus on managing risk. One way they do that is by aiming to buy stocks they like when they are reasonably priced.

The fund’s focus on its managers’ best ideas is reflected in the relatively big weightings for the fund’s top positions. Top holdings Apple (AAPL), Facebook (FB), Amazon.com (AMZN), UnitedHealth Group (UNH) and Visa (V) each account for more than 5% of fund assets.

Apple is up 46% in the past 12 months and FANG stocks Facebook and Amazon are up 51% and 58%. UnitedHealth is up 39% and Visa is up 46%.

“The data points around Apple have been noisy recently,” Hiatt said. “But we think that’s just from investors’ fine-tuning their expectations of the run rate of the new iPhone X.”

Also, she calls Apple attractively valued since its forward 12-month price-earnings multiple is trading at about a 25% discount to the S&P 500’s.

In addition, she says Apple should benefit from the recently enacted tax bill. It will get a lower tax rate, freedom to repatriate its overseas cash cache and more leeway in using that cash.


IBD’s TAKE: Tax reform should let Apple bring some of its $250 billion overseas money home at a tax rate of 15.5% vs. the old 35% rate. That could make billions of dollars available for stock buybacks, IBD has reported.


With Facebook, Hiatt sees a chance of earnings declining as the company continues to invest in itself. But she likes the company’s long-term outlook as Facebook finds news ways to monetize assets and as the number of users increases and advertising growth remains strong.

Hiatt also sees Amazon’s spending as an investment in its own future. Amazon’s internal investments have tended to pay off in terms of market share gains, she says. Amazon’s investments in its Prime program, for example, is paying off in the form of increased user spending. And Amazon’s takeover of Whole Foods Market helps Amazon “get closer to the customer, (capture) a high income customer base with relatively low merchandise overlap and gaining insights into fresh food distribution,” she said.

She especially likes Amazon’s trends outside the U.S., where its revenue last quarter was more than $1 billion higher than expected. “Add Prime penetration, Amazon’s increased capability in video and in groceries, in India, in health care,” she said. “There’s so much optionality that Amazon’s moat grows deeper and wider.”

Outside the technology sector, Hiatt likes prospects for UnitedHealth, one of the largest managed care companies. “What’s most exciting is its Optum business,” she said.

Optum provides pharmacy benefits management and technology services and also runs clinics and doctors’ offices. “This unit has significant amounts of data, which gives UnitedHealth a competitive advantage in being able to leverage that data to provide lower costs throughout its supply chain and lower costs to customers,” she said. “So it’s an area of significant growth.”

Hiatt also likes UnitedHealth’s acquisition of dialysis center DaVita‘s (DVA) medical unit, its fourth big takeover since the start of 2017.

And Visa benefits from refashioning the company’s Visa Europe business, which it acquired in 2016. “Visa Europe had been run like a co-op,” Hiatt said. “They’ve turned it into a profit-focused business, with a lot of upside.”

Visa also gains from the shift to digital payments for transactions. “They are a toll taker for global spending,” Hiatt said. “It’s a really scalable business. There isn’t much that they have to do for each incremental dollar they bring in.”

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