What's one of the most interesting things about T. Rowe Price U.S. Equity Research Fund (PRCOX), one of the best mutual funds? It finds a way to play cryptocurrency despite pursuing a low-risk approach to investing.
Another interesting trait? It is a big believer in harnessing lots of brain power. Two heads are better than one, right? How about 30 heads? That's the number of analysts U.S. Equity Research Fund currently has.
And the $10.5 billion fund lets all 30 of its analysts make stock buy and sell decisions.
The fund has delegated buy-sell power to its analysts since its opening in 1999, says Ann Holcomb, one of the fund's three managers.
Industrywide, stock picking authority is usually done by portfolio managers. Analysts typically provide supporting research.
Best Mutual Funds: Boosting Brain Power
Holcomb's fellow managers are Jason "Jay" Nogueira and Jason Polun. "We monitor the overall risk profile of the portfolio," Holcomb said. "As a team, we look holistically at how the pieces fit together."
Analysts notify managers of trades they want to make in advance. "We have veto authority," Holcomb said. "But we exercise that extremely rarely."
The aim is to help this portfolio remain among the best mutual funds. How? By rewarding analysts with buy-sell power, the arrangement motivates analysts to do well, Holcomb says. And it makes it easier for the fund's institutional clients to learn what analysts think about specific stocks. "It offers our clients direct access to research without the portfolio manager filter," Holcomb said.
The fund's focus on research is reflected in its name. T. Rowe Price changed the fund's name in July 2019 from Capital Opportunity.
Focus On S&P 500
The fund's primary hunting ground is the S&P 500. But the aim of having a large number of fund buy-sell decision makers is to boost odds that the fund holds stocks that are thriving at any given moment. No matter which way the broad market is tilting. Along with cryptocurrency, the fund's bets range from auto parts stores to the Zoom Video platform.
That decentralization makes it more likely that the fund will be a diverse mix of value and growth stocks, Nogueira says.
An active, low-risk approach is a core element of the fund's strategy, Holcomb says.
The fund diversifies in two more ways. For one, the portfolio held 245 positions as of Jan. 31. And about 10% of the portfolio now consists of stocks that are not in the S&P 500.
Recent buys outside the index include drug maker AstraZeneca, videoconference host Zoom Video Communications and garbage disposer Waste Connections.
And analysts have used the recent broad market pullback to add to or start positions they already liked, at attractive valuations.
Real Money Through Crypto
How can the fund's cryptocurrency play help U.S. Equity Research return to its perch among the best mutual funds?
The crypto play by Signature Bank is indirect. It holds operating funds for Coinbase Global and four additional cryptocurrency exchanges. Crypto exchanges "keep their operating U.S.-dollar deposits there, much of which comes when their clients open an account with initial dollars," Polun said.
Polun added, "People are not trading crypto through the bank."
Signature's operations are mainly in metropolitan New York City.
Signature's noncrypto business lines are the main reason U.S. Equity Research likes the bank. "The real Signature story is their culture," Polun said.
Unlike most banks, Polun says, Signature assigns one staff person to each customer. Whether a customer needs to arrange a car loan, home mortgage, credit card or bank account, they talk with their same bank representative. That builds customer loyalty, Polun says.
And like banks in general, Signature stands to benefit from rising interest rates. Still, Signature overall accounted for a modest 0.25% weighting in the portfolio as of Dec. 31. Recently, Signature happened to be a member of the IBD 50.
The IBD 50 is IBD's flagship screen of leading growth stocks that show strong relative price strength and top-notch fundamentals.
Prognosis For Vertex Pharma
Vertex Pharmaceuticals, which is a member of the IBD 50 as well as the IBD Leaderboard, is also intended to help Large-Cap Growth stay in the winners' circle of best mutual funds.
Leaderboard is IBD's curated list of leading stocks that stand out for their technical and fundamental prospects.
Vertex markets three treatments for cystic fibrosis. Those treatments comprise a global market worth about $10 billion. The disease causes a human to produce thick mucous, which clogs organ like the lungs. "Their treatment is really miraculous," said Nogueira. "It saves lives. And our analyst feels the durability of the existing cystic fibrosis treatment franchise is excellent. And they're doing research to further their lead."
The company is trying to develop other drugs for ailments related to kidneys, pain and diabetes, Nogueira says. But the share price reflects little more than sales of Vertex's cystic fibrosis treatment.
"That offers an attractive opportunity," Nogueira said. "It's a good bet that they will succeed at something else, but you're only paying for the cystic fibrosis business."
Play On Fertilizer Rebound
What else helps make U.S. Equity Research one of the best mutual funds? Check out CF Industries. Another Leaderboard stock, CF Industries makes nitrogen fertilizers.
Wide swings in the stock's recent quarterly earnings per share — EPS grew 8%, 133%, 44% and 999% the past four stanzas — reflect the cyclical nature of the company's business. It sees wide swings in supply and demand, Holcomb says.
The last peak in supply vs. demand occurred roughly in 2016-2017. That "led to a deep trough in pricing," Holcomb said. A key cause was excess production in China. After that, Chinese production declined. In addition, low grain prices globally dampened demand for nitrogen products in fertilizer.
Still, in 2020 grain prices began to rise. Farmer demand rose. "It's been a generally good environment for CF," Holcomb said. "They've been paying down debt. They generate free cash flow. And their balance sheet is strong. They've been buying back stock appropriately. They've focused on their dividend."
Holcomb adds that CF's addressable market has expanded. Nitrogen is used to produce ammonia. In turn, ammonia is used to transport hydrogen. Demand for hydrogen is rising as it's seen as a noncarbon-producing renewable energy source.
By The Numbers: One Of The Best Mutual Funds
U.S. Equity Research Fund became an IBD Best Mutual Funds Award winner by topping the S&P 500 in 2020 and in the three, five and 10 years that ended that Dec. 31.
It fell short of repeating in the next Awards compilation by lagging the benchmark in 2021 by less than one percentage one, 27.98% vs. 28.71%. So far this young year, it's outperforming by pulling back less than the big-cap bogey, -4.64% vs. -5.02%, going into Wednesday. Large-cap blend funds tracked by Morningstar Direct are down 5.03% on average.
T. Rowe Price has opened an ETF version (ticker TSPA) of U.S. Equity Research.
Follow Paul Katzeff on Twitter at @IBD_PKatzeff for tips about retirement planning and active mutual fund managers who consistently outperform the market.
