Fund manager Terrence Kontos aims to keep TIAA-CREF Large Cap Growth Fund (TILGX) one of the best mutual funds by not putting all of his growth stock eggs in one basket.
“We look for opportunities across the market. Diversification is important,” Kontos said.
As a result, the $6.9 billion portfolio consisted of a nonconcentrated 94 growth stocks as of March 31. Information technology was its largest sector with a weighting of 36%, consumer discretionary and communications services were the next largest. Kontos had 21% and 19% of his shareholders’ money at work in those spaces.
Top-10 growth stocks included FAANG stocks Facebook (FB), Amazon.com (AMZN), and Apple (AAPL). Google-parent Alphabet (GOOG) and Netflix (NFLX) are also in the portfolio. Holdings include drugmaker Horizon Therapeutics (HZNP), chipmaker Nvidia (NVDA), payments processor PayPal (PYPL) and car and battery maker Tesla (TSLA).
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Best Mutual Funds: Taking A Long View
There’s one more thing Kontos does to keeps this fund among the best mutual funds. “We tend to take a long-term view,” he said. “In our strategy over the past eight years, our annual turnover has averaged in the 30% area. That gets you to a three-year average holding period.”
Further, Kontos seeks growth stocks with four key traits. He wants companies with exposure to expanding market opportunities. He looks for attractive business models. “Usually, those business models benefit from scale,” he said. Third, he wants companies run by competent managers. Fourth, he wants companies that are protected by a moat. “I like companies with a competitive advantage,” he said.
Leading Stocks Make This One Of The Best Mutual Funds
Leading growth stocks help make this one of the best mutual funds. For example, Nvidia, PayPal and Horizon Therapeutics all happened to be recent members of the IBD Leaderboard.
Leaderboard is IBD’s curated list of leading stocks that stand out for their technical and fundamental prospects.
Nvidia Chips Perform Fast Math
Nvidia makes graphics processing units. GPUs are programmable. Their ability to perform fast math makes them better for applications from video games to computer graphics, cryptocurrency mining and artificial intelligence (AI).
Nvidia’s software development platform, CUDA, allows developers to access libraries of operating code to build and deploy applications. In turn, those applications use Nvidia GPUs.
“Nvidia is levered to every high-growth megatrend in the world today, whether it’s gaming, AI, machine learning, autonomous driving or cloud computing,” Kontos said. “What’s incredible is that seven or eight years ago the company was left for dead due to missteps. Their transformation has been unprecedented. It’s a testimony to the acumen of their leadership team. That’s one of the key traits I look for.”
Nvidia also displays the other three key traits. “They’ve got a super attractive end market that’s growing,” Kontos said. “They’ve got a winning business model. And their moat is their technologies and their people.”
If holding growth stocks that drive megatrends is a key ingredient in making a portfolio one of the best mutual funds, Nvidia looks custom-tailored for that role to Kontos. “It’s as if this company was purpose-built for some of the biggest megatrends in the tech sector that we’ve seen in a generation,” he said. “It’s simple to think through where the world is going, and who’s going to be the arms dealer for those new opportunities. That’s Nvidia.”
Going into Tuesday, Nvidia was 5% below a buy point of 615.00 in a cup pattern.
PayPal Usage, Engagement Keep Growing
PayPal’s number of users and their engagement have soared. “That’s because they are at the intersection of digitization of payments,” Kontos said.
PayPal’s usage grows globally as young consumers shift to digital payments from cash, credit cards and checks. “PayPal owns the peer-to-peer payment platform Venmo,” Kontos said. “If you have anyone in your household under age 21, you know they don’t carry cash. They use Venmo to pay for everything. PayPal can compound its profit north of 20% annually for the next five years plus.”
PayPal’s innovations could help this portfolio remain among the best mutual funds. PayPal launched a cryptocurrency trading service in November, allowing clients to buy and sell Bitcoin.
Recently, PayPal began to let customers use cryptocurrencies to shop at the 28 million merchants on its network. And last month, PayPal introduced Crypto on Venmo. The service lets users buy, hold and sell cryptocurrency within the Venmo app.
Admiring Elon Musk’s Achievements
Kontos seeks companies run by competent managers. Recognizing that competence can come with controversy is part of what enables Kontos to manage one of the best mutual funds.
Take Tesla’s colorful Elon Musk. Musk recently informed the Securities and Exchange Commission (SEC) that his title is Technoking of the company. He said he would retain his chief executive officer position as well. Kontos calls Musk a “polarizing manager.” Still, Kontos is a Musk admirer.
Kontos points out that Musk is “legitimizing and mainstreaming” the electric vehicle industry “and leading the revolution in transportation that is still in its early stages.”
Musk has accomplished that by achieving two totally pragmatic goals. He has created a product that people want. And he has optimized production — the cost-efficient manufacturing of automobiles on a competitive scale.
Share price is up about 375% in the past 12 months, going into Tuesday. The share price has pulled back about 26% from its all-time high of 900.40 on Jan. 25. But Kontos is unfazed by Tesla’s stock volatility. “Growth companies go through phases of relative attractiveness,” he said. “It might be at a phase where the market is digesting a lot of good news and excitement.”
How Horizon Is Evolving Its Business
Among other leaders, Horizon’s market opportunities are expanding because the company is chaperoning newly acquired drugs to market. Many other investors’ short-term focus prevents them from appreciating the longer-term potential in the company’s move, Kontos said.
Recognizing longer-term potential enables a portfolio to be one of the best mutual funds.
Kontos characterizes Horizon as having focused on commoditized therapeutics in the past. But Horizon has acquired two specialty drugs. Krystexxa is used to treat chronic gout. The other is Tepezza, “which is used to treat an eye condition caused by thyroid imbalances that cause the patient’s eyes to bulge out,” Kontos said.
He added, “These are a testament to the Horizon team. They’re reinventing themselves into areas with much more relative growth prospects, more than their legacy drugs. These two drugs can triple in (sales) size over the next few years. And they have patent protection through the end of the decade.”
Kontos said. “In addition to the continued upselling opportunities for Krystexxa and Teppeza, there are continued indications for the two drugs that could expand their addressable market opportunities further.”
Horizon is a 0.4% weighting in the portfolio.
What Makes Large-Cap Growth One Of The Best Mutual Funds
TIAA-CREF Large-Cap Growth is a 2021 IBD Best Mutual Funds Awards winner. Its 2020 44.24% return more than doubled the 18.40% gain by the S&P 500. It topped the big-cap bogey in the three, five and 10 years ended Dec. 31 on an average annual return basis.
Through April 30, so far this young year the fund is up 9.58% vs. 12.15% by the S&P 500 and 7.89% by its large-cap growth peers on average tracked by Morningstar Direct.
Follow Paul Katzeff on Twitter at @IBD_PKatzeff for tips about retirement planning and active mutual fund managers who consistently outperform the market.
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