Julianne McHugh, lead manager of best mutual fund BNY Mellon Large Cap Securities (DREVX), isn't interested in blue-chip stars of yesteryear. When it comes to stock picking, she's more of a futurist than a rear-view-mirror type.
She bets on Wall Street's stars of tomorrow: Stocks that can surprise to the upside over and over again. Often, they are names that dominate now but have what it takes to be market leaders for years to come.
What This Best Mutual Fund Looks For
McHugh ticks off the stock traits she looks for in easy-to-grasp, bite-sized chunks: "Forward-looking blue chips," "serial compounders," "long-term growers," "first-movers," "stable and resilient" and "innovative."
All those catchy descriptors are code words for best-and-breed companies. Businesses on the forefront of whatever the next big thing that have a long growth runway ahead.
It's why McHugh, who works with co-manager Karen Miki Behr, is fine with betting big on Nvidia, the AI chip leader. But they also hold large positions in cloud-computing leader Microsoft and innovative drugmaker Eli Lilly, which is boosting its sales and earnings with next-gen weight-loss drugs.
Beat Mutual Fund Beats The Market
BNY Mellon Large Cap Securities' focus on leaders with a bright future has been a boon for the fund's shareholders. The fund, a 2024 IBD Best Mutual Funds Award winner, has topped the benchmark S&P 500 in the past one-, three-, five-, and 10-year periods.
And the fund's year-to-date gain (through May 7) of 14.2% is more than four percentage points better than the S&P 500's 9.1% return. The fund launched in 1951. And McHugh (and Behr), who took over in September 2021, is now adding her stamp to the fund's long-term success.
McHugh said the fund's portfolio managers and analysts spend their days navigating the fast-changing world. While every fund is looking for strong earnings growth. McHugh's team is looking for that little extra that will propel the stock price higher for longer.
"What we're looking for is a quality company that Wall Street is really underestimating the duration of growth," McHugh told IBD. Whereas other investors might see Nvidia's or Eli Lilly's earnings or sales growth beating forecasts this quarter or next, BNY Mellon Large Cap Securities sees the beats lasting for a much longer time.
Putting Quality Over Quantity
Overall, McHugh only likes to add quality businesses with strong management teams with a focus on value creation to her concentrated portfolio of about 50 stocks. The companies she owns also have strong products with competitive positioning that drives demand and market share.
She looks for long-term growers. Stocks that can compound for extended periods of time.
"It's not just a description of growth, it's more about, is the market underestimating the potential," said McHugh. "That's where I think we gain our edge."
McHugh isn't the type to overdiversify or water down the portfolio with names she's not really sold on.
Any stock that makes it into BNY Mellon Large Cap Securities is a "high conviction" name that "we place our bets behind," said McHugh.
Driving Future Growth For A Best Mutual Fund
Many blue chip stocks of tomorrow are names that have an innovative product introduction that can drive growth going forward. And it doesn't have to be an unknown small or midcap company, either. It can be an already established blue chip stock profiting from fresh innovation.
Case in point: Eli Lilly, a top 10 holding in BNY Mellon Large Cap Securities. Its breakthrough drugs Mounjaro, which helps lower blood sugar and reduce weight for people with type-2 diabetes, and its weight-loss cousin Zepbound (which was approved by the FDA last November), are driving growth today and into the future.
In the first quarter, sales of Mounjaro and Zepbound accounted for 26% of Eli Lilly's $8.8 billion in revenue, according to the company.
McHugh's team first flagged these next-gen pharmaceuticals back in 2018. "(Mounjaro) the diabetes drug has changed the face of diabetes treatment," said McHugh. "It's a game-changer." The use of the drug to treat obesity under the Zepbound name adds to the company's growth trajectory.
Eli Lilly is an example of the type of new product that can create a new market that she seeks to invest in. "We look for companies that are introducing something new that has longevity and long duration (of upside)," said McHugh.
Jumping On Nvidia
Nvidia, the fund's No. 1 holding at the end of March and a member of the Magnificent Seven megacap tech ranks, isn't an undiscovered stock. But the chipmaker is among McHugh's biggest "active weight" (her term for overweight versus the S&P 500) because it's got a head start in AI. "There's a long-term, transformational shift underway in the tech industry," said McHugh. "Nvidia chips are embedded in almost every AI application."
The better news: McHugh thinks it will be tough for other chipmakers to elbow into Nvidia's turf in a major way — at least for now.
"There is no close competitor right now," said McHugh. "They have a clear first-mover advantage. Sometimes those first-mover advantages can fade away. We don't see that yet."
Amazon, a top 10 holding and Magnificent Seven stock, is another stock McHugh likes. She likes the competitive, distribution and cost advantages Amazon gets from its e-commerce business as well as its push into the cloud with its Amazon Web Services (AWS) cloud-computing business. What these businesses offer McHugh's fund is what she craves: "It gives you duration to the company's growth," said McHugh.
Magnificent Seven Not All Equal For Best Mutual Fund
Speaking of the Magnificent Seven, you can't speak about them all in the same way. Each has an individual story. And each has a different growth trajectory now. For now, McHugh still likes Nvidia, Amazon, as well as Microsoft.
McHugh remains bullish on Microsoft. It's not just because its Office 365 suite has a high barrier of entry for competitors. Microsoft is also a leader in the fast-growing "transformation cloud computing and infrastructure" business, said McHugh.
"For me, the investment thesis for Microsoft is that it will be a key beneficiary of a multiyear adoption of cloud infrastructure," said McHugh.
She's less bullish on Apple, another top holding, at the moment. She cites slowing iPhone sales, concerns about its business in China, as well as worries about whether it, too, will be able to take advantage of the innovation cycle in AI.
Opportunities In Industrials, Too
Another top 10 holding McHugh likes is Ingersoll Rand, an industrial company that makes industrial products, such as compressors that are vital to energy efficiency. "So, whether you're thinking about data center growth and needing more energy-efficient products, or you're thinking about the inflationary environment where companies are trying to save on power, they're increasing demand and benefiting from this product cycle," said McHugh.
McHugh also is bullish on JPMorgan Chase. The big selling point for the bank's shares is the stellar leadership of CEO Jamie Dimon, says McHugh. "JPMorgan is an industry leader," said McHugh. "Dimon is somebody who has proven year after year the resilience of the bank and his ability to manage through a variety of economic and market environments."
When it comes to the market as we head into summer, McHugh says she wishes she had a crystal ball to see the future. But, like everyone else, she's heard all the risks, ranging from the Federal Reserve and interest rates to political uncertainty to wars in Ukraine and Gaza.
Her advice to investors? "Expect the unexpected," said McHugh.
