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Diversified Hot Stocks Give This ClearBridge Fund Its Edge

One key trait that enabled $19.4 billion ClearBridge Large Cap Growth Fund (SBLGX) to earn its spot among the best mutual funds: Returns with lower volatility.




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In particular, the fund tends to gain more than its Russell 1000 Growth Index benchmark by picking and holding growth stocks in strong markets. And over time it loses less in downturns, according to Morningstar.com.

How does it manage that? Managers of the fund seek a variety of growth stocks, so the fund can thrive in different market conditions. That helps the fund make the most of its upside potential. And it enables it to slide backward as little as possible during the inevitable tough times.

Result? Performance among the best mutual funds.



Best Mutual Funds: This Portfolio’s Three Types Of Growth Stocks

Each of the fund’s stocks falls into one of three buckets. Co-managers Margaret Vitrano and Peter Bourbeau call their first bucket select growth.

They expect those stocks to grow earnings faster than the overall market average. Vitrano and Bourbeau expect their stable growers to be “Steady Eddies.” They may not be the fastest growers, but the idea is for them to plug ahead no matter what’s going on around them.

And their cyclicals do well not just when economic conditions provide a tailwind. They can be rebounding from some setback. “It can be a situation where a company has some ephemeral issue going on, where revenue and profits are depressed but for reasons that are fixable,” Vitrano said. “Like Chipotle (CMG), after they had the foodborne illness situation. And Target (TGT) after they had the security breach. And American Express (AXP) after they lost a big piece of business from Costco (COST).”

The mix of stocks means that the fund tends to miss out on the peaks of hot markets.

But the fund’s stable growth stocks are shock absorbers, typically protecting the fund from the worst of a market decline.

Select growth holdings include chipmaker Nvidia (NVDA) and lithography systems maker ASML (ASML).

Stable growers include Home Depot (HD) and Thermo Fisher Scientific (TMO). Cyclicals include Booking Holdings (BKNG) and Raytheon Technologies (RTX).

Vitrano and Bourbeau have 48% of their shareholders’ money at work in stable growers, 36% at work in select growers and nearly 16% in cyclicals.

How Nvidia Helped Large Cap Growth Become One Of The Best Mutual Funds

What is Nvidia’s role in making Large Cap Growth one of the best growth stock mutual funds? Nvidia’s graphics processing units perform fast math. That makes those GPUs suitable for applications from videogaming to autonomous driving and cryptocurrency mining.

Here’s one way to think about their strength, Vitrano says: They can perform many calculations at once. In contrast, ordinary central processing units do one thing at a time.

One macro factor that Nvidia benefits from is the global chip shortage. Another macro trend that benefits Nvidia is the proliferation of enterprise data centers. “The company can grow profits 30% annually for multiple years, as more uses for GPUs arise and the need for more sophisticated chips grows, especially as data center (business) scales and grows quickly,” Vitrano said.

There may be ups and downs in yearly growth of demand for Nvidia GPUs, she says. “But longer-term, the runway is long,” she said.

ASML’s Cutting Edge Technology

ASML’s cutting edge technology is a driver of this ClearBridge fund’s push to remain among the best mutual funds.

ASML is a Dutch maker of lithography systems used in the manufacturing of computer chips. It is a leader in the creation of the chipmaking machines that use extreme ultraviolet light (EUV), which enhances their precision.

“Theirs is one of the few ways to make semiconductors with the most advanced nodes (which means more transistors per chip),” Vitrano said. “Also, they have a backlog of orders. So they have good earnings visibility.”

Another boost for ASML comes from the fact that leading chipmakers Intel (INTC) and Taiwan Semicoductor (TSM) both are constructing new manufacturing plants in the U.S. Both “will buy tools from ASML,” Vitrano said.

Recently, Nvidia and ASML have been members of both the IBD Leaderboard and the IBD 50.


Leaderboard is IBD’s curated list of leading stocks that stand out for their technical and fundamental prospects. The IBD 50 is IBD’s flagship screen of leading growth stocks that show strong relative price strength and top-notch fundamentals.


Online Shopping Boosts UPS

Unlike those select-growth holdings of the fund, United Parcel Service (UPS) is in Large Cap Growth’s stable growers bucket. “What’s UPS doing in a fund like this?” Vitrano asked rhetorically. “We’re different. We’re not just a closet technology fund. We want diversification.”

She added, “Shipping packages may not seem the most innovative business model. But the shift of consumption to online is growing quite well.”

A second benefit is that new CEO Carol Tome is seeking only the most profitable new business. UPS just set a target of adjusted operating margin of between 10.5% and 12% in 2023. “Their international margin has been higher for some years,” Vitrano said. “This is an opportunity for improvement.”

By The Numbers: One Of The Best Mutual Funds

Large Cap Growth 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.

This year going into July 7, the fund lagged the S&P 500, 13.42% vs. 16.51%, and 13.97% for its large-cap growth rivals tracked by Morningstar Direct. But in the prior month alone, amid a rally by growth stocks vs. value-oriented stock, the fund outperformed the bogey, 6.33% vs. 2.79%.

Follow Paul Katzeff on Twitter at @IBD_PKatzeff for tips about retirement planning and actively run portfolios that consistently outperform and rank among the best mutual funds.

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