By Lawrence Strauss
Large-cap growth funds -- paced by most of the "Magnificent Seven" technology stocks -- closed out the first half of 2024 on top of the mutual-fund universe.
After ceding a bit of turf following the first quarter, U.S. large-cap growth funds came roaring back to dominate the latest edition of The Wall Street Journal Winners' Circle ranking. All of the top 25 mutual funds in the latest survey, which covers the 12-month period ended June 30, are in the large-cap growth category.
In the write-up about the survey ended March 31, three of the top 10 funds came from outside large-cap growth -- suggesting investors might find a change from the tech-heavy, large-cap funds that have been leading the market higher over the past several quarters. Topping that first-quarter list was Hennessy Cornerstone Growth Fund (HFCGX), which is classified as a small-cap blend fund. The fund acquitted itself well in the most recent survey, but it slipped to No. 28 -- still in the top 3%.
Finishing No. 1 this time, however, was Alger Capital Appreciation Fund (ACAAX), helmed by longtime managers Patrick Kelly, Dan Chung and Ankur Crawford. The $1.9 billion fund notched a 12-month return of 42.4%.
Founded in 1964, Alger is a growth-focused shop. The firm had four other funds finishing just behind the winning fund in the top 10 of the most recent survey, including in the No. 2 spot a second capital-appreciation fund that caters to institutional investors under the ticker ALARX. It was followed by Alger Focus Equity Fund (ALGRX) at No. 3, and Alger Capital Appreciation Portfolio (ALVOX) at No. 4. Alger Spectra Fund (SPECX) finished in the No. 7 spot, up 40.1%.
For the latest 12-month period, most of the funds finished in the green. Of the 1,218 funds in the latest survey, only 15 lost money . The average 12-month return among the funds meeting the survey's criteria was 16.5%.
Survey parameters
To qualify for inclusion in the Winners' Circle, funds must be actively managed U.S.-stock mutual funds with more than $50 million in assets and a record of three years or more, as well as meet a handful of other criteria. The survey excludes index and sector funds, funds that employ leverage strategies and most quantitative funds. The results are calculated by Morningstar Direct.
This quarterly competition, as usual, isn't designed to create a "buy list" of funds for readers, but to demonstrate the ways that specific investment strategies benefited from recent market trends.
Helping lift the performance of those Alger funds and others that finished at the top of the quarterly survey was one of the biggest trends in markets right now: The explosion in artificial intelligence and the technologies that support its adoption and growth.
Specifically, portfolio exposure to at least some of the Magnificent Seven names -- Nvidia, Amazon.com, Apple, Google parent Alphabet, Facebook parent Meta Platforms, Microsoft and Tesla -- was common among the top-performing funds.
Tesla's stock dropped 24% in the 12 months ended June 30, the only one of the Magnificent Seven in the red over that stretch. Apple returned 9%, and the other five notched at least double-digit gains, led by Nvidia at 192%, according to FactSet.
The S&P 500's first half 2024 total return, including dividends, was 15.3% according to S&P Dow Jones Indices. Excluding those seven stocks, it was only 6.3%.
"We've seen that fund managers are overweight many of those stocks and underweight your average S&P 500 stock," says Jill Carey Hall, senior U.S. equity strategist at BofA Global Research, referring to most of the Magnificent Seven and a few other large-cap stocks.
The winner
Indeed, Alger's Kelly attributes his fund's showing in part to being overweight stocks such as Nvidia, Microsoft and Meta Platforms.
Another winner for Alger was a big beneficiary of the AI boom: Vertiv Holdings, which makes liquid cooling technologies and provides power for data centers. The stock gained 250% over the period covered by the survey.
Other contributors to the strong performance included medical-test maker Natera, up about 120%, and TransDigm Group, which makes aircraft components. It returned 48%.
Kelly and his colleagues look for holdings in two buckets, one of which focuses on "traditional high-unit volume growth stocks" that are taking market share. Case in point: Amazon.com, which the fund has held since 2009.
The other bucket is for companies undergoing change from factors such as new management, a new product or an acquisition.
Kelly cites Microsoft as such an example. Alger got into the stock in 2013, the year before Satya Nadella took over as chief executive and the company was still reliant on Windows and software. Kelly credits Nadella for doing "an incredible job of repositioning the company for the cloud and to benefit from AI."
'Sweet spot'
Funds further down in the rankings, too, were boosted by the Magnificent Seven and a few other big-time performers.
Consider Gabelli Growth Fund (GABGX), which placed 10th in the Winners' Circle. As of the end of June, the $1.1 billion fund had 52% of its assets in six holdings: Microsoft, Nvidia, Alphabet, Amazon.com, Meta and Eli Lilly.
While pharmaceutical company Eli Lilly isn't in the Magnificent Seven, it has benefited handsomely from its weight-loss drugs such as Zepbound -- another central investing trend lately. The stock's total return was 94% over the previous 12 months.
"These companies have really been in the sweet spot for the last 18 months," says Howard Ward, who has run the fund for nearly 30 years.
Ward, meanwhile, says that he hung in there with a lot of the large-cap tech stocks that faltered in 2022. That's when "the multiples on high-growth stocks got smashed," as he puts it. The fund had a lousy 2022, off 39%.
"We stuck with the companies through this period," Ward says, adding that he and his co-manager, John Belton, aim to invest in "leading global tech titans" that dominate their fields and platforms.
Besides the six aforementioned stocks, the fund's top holdings include Apple and Netflix. Ward added to his position in the latter stock in May of 2022 when it was at $190. It's now around $682.
He initially invested in Nvidia more for its graphics cards used for games than for AI, he recalls. He launched a position in Nvidia in 2019 for $5 million, he says, and it's now worth $140 million. "We sort of backed into that," he says.
Small change
Hennessy Cornerstone Growth Fund, last quarter's top performer in the survey, dropped to No. 28. But its 12-month return of 36.6% wasn't shabby.
The $425 million fund, which holds 50 stocks, is in Morningstar's small-cap blend category. Once a year the fund reconstitutes its holdings based on its criteria for admission: a market cap above $175 million, a price-to-sales ratio below 1.5, annual earnings higher than the previous year's result, and positive price appreciation over the past three- and six-month periods.
Following the latest makeover, which took effect early in the second quarter, the fund's latest portfolio had just one holdover, Emcor Group, according to Josh Wein, one of the portfolio managers.
And it lost a big contributor to its first-quarter performance: Super Micro Computer, another beneficiary of the AI boom. It's no longer in the fund, but it gained about 300% from July 1 of last year through March 30.
Among the fund's newer holdings that have performed well: Sprouts Farmers Market, up 30% in this year's second quarter, and internet retailer Groupon, which has gained nearly 15% during the second quarter.
Another winner for the fund recently has been Blue Bird, which makes school buses. The stock was up 40% in the second quarter.
"They are transitioning their product line to electric vehicles," says Wein. "For school buses, that makes a lot of sense."
Lawrence Strauss is a writer in Millburn, N.J. He can be reached at reports@wsj.com.
(END) Dow Jones Newswires
July 07, 2024 10:00 ET (14:00 GMT)
Copyright (c) 2024 Dow Jones & Company, Inc.
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