Manager Jim Tierney, whose $12.2 billion AB Concentrated Growth Advisor Fund (WPSGX) is among the best mutual funds, knows that his fund’s shareholders want two things from Concentrated Growth Advisor. They want outperformance over time. And they want to achieve that without the kind of volatility that would keep them awake at night.
For outperformance, Tierney constructs a portfolio that is concentrated. He held just 20 names as of Aug. 31.
But doesn’t that deprive him of diversification, the classic defense against market volatility? Volatility has been a heightened concern for individual investors since the broad market began to downtrend in September.
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Tierney sees no need to be more diversified. He prefers to focus on just his best ideas in this AllianceBernstein fund.
Best Mutual Funds: By The Numbers
Tierney credits that lineup of all-star stocks with shielding his portfolio from volatility. In the three years ended Sept. 30, it gained 109% for every 100% the S&P 500 rose, according to Morningstar.com. And it limited its losses to 98% of the S&P 500’s in downturns.
The result: a portfolio that’s one of the best mutual funds.
This year through Sept. 30, Concentrated Growth Advisor was up 16.76% vs. 15.92% for the S&P 500 and 12.43% on average for large-cap growth funds tracked by Morningstar Direct.
U.S. Global Leaders Growth Fund became an IBD Best Mutual Funds Awards winner by topping the S&P 500 in 2020 and in the three, five and 10 years ended Dec. 31.
Tierney, who is 54 years old, talked with IBD about his investment approach from his office in midtown New York City.
How Does This Fund Dampen Volatility?
IBD: Jim, what do you look for in a stock?
Jim Tierney: High-quality stocks with conservative balance sheets. Those stocks let our shareholders sleep at night.
IBD: Why such a concentrated portfolio?
Tierney: There are a couple of reasons. First, there aren’t hundreds of great businesses and managements out there. I only want the best of the best.
Second, with quality businesses, I don’t have to overly diversify to control risk. I can do that with 15 to 20 great businesses. I can still diversify properly.
What Is This Fund’s Secret Weapon?
IBD: Is there’s a hidden reason for the fund’s outperformance?
Tierney: We have good upside capture. We have strong downside protection. If you don’t fall into a deep hole in down markets, you have less distance to climb to get out of a hole.
Parking Lots Full Of Hondas, Not BMWs
IBD: How do you recognize those companies?
Tierney: We kick the tires on companies. We visit their place of business. We not only talk with management. We look at things like what kind of cars are in their parking lot. If they have Audis and BMWs and Porsches, they’re a fat and happy business. They’re not as driven as a business whose lot has Toyotas and Hondas and Kias.
In the lunch room, does the CEO interact? Do managers know people by name? Is the workplace hierarchical? Or do we see rapport?
One Of The Best Mutual Funds Plays The Reopening
IBD: Are you taking advantage of the U.S. economic reopening?
Low-priced clothing chain TJX Companies (TJX) benefits as people get out of their homes. During the depths of the pandemic, people didn’t get out of the house. They didn’t need new apparel. Now, people are going out, they’re shopping. That means good things for TJX.
Unemployment is down to 5.2%. The low was 3.8%. There are 11 million unfilled jobs in the U.S. That means good trends for Automatic Data Processing (ADP) (a provider of HR and payroll solutions).
Why One Of The Best Mutual Funds Likes Schwab
IBD: Are you making any plays on inflation?
Tierney: The 10-year Treasury should reflect the real cost of money. Rates will be higher. Schwab (SCHW) is a stock that should benefit from rising rates. They’ll make more money lending out depositors’ cash.
Microsoft Helps This Stay Among The Best Mutual Funds
Tierney: Yes, we own it for several reasons. The growth of cloud services has driven Azure. Azure’s revenues are growing 40% to 50% annually. And we see years of growth ahead.
Amazon Web Services and Google Cloud are the other two big cloud winners.
The move to remote work has been a key driver of cloud services.
But they’ve also got pricing power in Microsoft 365, their online Office suite. They’ve got their legacy Office suite. And they’ve got gaming.
Microsoft has done a great job adding services. Since Satya Nardella succeeded Steve Ballmer as CEO in 2014, he’s done a great job balancing growth with margins. Everyone must digitize these days. That’s great for Microsoft.
Are Facebook’s Regulatory Risks A Worry?
Tierney: Actually, we see it as the single cheapest big-tech name. Our earnings per share estimate for next year is $16.31. That puts their price-earnings ratio at 23.
In comparison, Microsoft is 30. Amazon (AMZN) is 47. Alphabet (GOOGL) is 31. We don’t have an earning estimate for Apple (AAPL), which just doesn’t have enough unit growth. But the P/E on Apple is in the 30s. So Facebook’s is significantly lower. That tells us people have overly discounted the (stock because of) risk of regulatory issues on this business. The ridiculously low multiple offsets the regulatory risk.
IBD: Is Facebook a good corporate steward?
Tierney: Instagram was a small business when Facebook bought them. WhatsApp was unprofitable. Facebook has done great things with them.
How This CRO Helps One Of The Best Mutual Funds
IBD: Earnings per share growth by Iqvia Holdings (IQV) are accelerating. They rose 2%, 21%, 45% and 81% the past four quarters. What’s your thesis?
Tierney: This (clinical research organization) runs clinical trials for new drugs. They’re especially helpful for smaller drugmakers, which might not have as much infrastructure resources for trials as larger companies. And this is helpful in testing drugs that help smaller populations of patients. Clinical trials have to be just as thorough. And they did some trials for Covid-19 drugs. They had to be done fast.
Does American Tower Add Zip To Tierney’s Fund?
IBD: Is American Tower (AMT) one of those high-quality holdings that helps anchor the fund with steady performance?
Tierney: We see an incredibly stable, predictable business. If there were a recession tomorrow, would people dump their cellphones? Probably not. So tenants for cellphone towers won’t decline. American Tower has long-term fixed contracts with its telecommunications companies.
If anything, those tenants need more and better equipment on towers. They need more equipment more closely spaced. The world is using more data each year, so more equipment to handle that flow is needed. And the rollout of 5G networks only accelerates that.
And when cars truly talk with each other and drones are flying everywhere, demand for space on towers to carry more data will climb.
Animal-Care Products Beef Up This Fund
IBD: Zoetis (ZTS) provides health care products for animals. They benefit from the fact that pet owners and farmers will pay dearly to protect their critters, right?
Tierney: Pet ownership trends are fantastic. Global protein consumption trends are strong.
But the biggest differentiating factor for Zoetis is that they are the biggest such firm and have the best sales team. They sell a broad range of products. And when they call, they get time with doctors, ranchers and farmers. That’s invaluable to their ability to cross-sell new products. That’s their moat.
Connecting The Electronics
IBD: So many products have more and more electronics inside. Amphenol (APH) makes the connectors that tie those electronics together. Is that this company’s driver?
Tierney: They sell to original equipment manufacturers across a wide host of industries. Their connectors go into cars, appliances, airplanes, telecommunications equipment, phones. It’s very diversified.
Everything will have more electronics content. All of those things will run faster and have to function in harsher environments.
The company is held back a little by global supply chain problems. OEMs can’t get enough computer chips. If General Motors (GM) closes a plant for two weeks, they don’t need Amphenol stuff for two weeks. But once the supply chain problems are cleaned up, the environment will be positive for Amphenol.
Helping Firms Digitize Helps One Of The Best Mutual Funds
IBD: How does CDW (CDW), the technology services provider, fit your overall strategy?
Tierney: CDW is the biggest reseller of technology equipment and services in the U.S. Digitizing means that companies must buy more equipment and services. And companies want not only the best price but also the best advice.
CDW offers both. Their consulting services basically explain what you need. And they can get it for you. Over the past 18 months, the world has been short of tech hardware. As the biggest buyer, CDW has been able to source products better than others. Customers remember. They know CDW took care of them in 2020. That will make many of them loyal customers for life.
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