Now one of three managers of $557.3 million Delaware Growth Equity Fund (FICGX), Steve Smith says risk controls he learned as a NASA engineer in the space agency's moonshot heyday helped make Growth Equity one of the best mutual funds in recent years.
A key reason for Growth Equity's liftoff has been its outperformance. And Smith and his fellow managers — John Brim and Eivind Olsen — expect stocks like drug maker Pfizer, car parts retailer AutoZone and department store giant Target to help their fund stay in high orbit among the best mutual funds.
They also foresee a lot of thrust from computer chip designer Nvidia, asset manager Ameriprise and software titan Microsoft.
The latter three holdings were recent members of the IBD Leaderboard.
Leaderboard is IBD's curated list of leading stocks that stand out for their technical and fundamental prospects.
Best Mutual Funds: NASA Veteran Pilots Fund
Smith started out as an engineer at NASA. "I was there when NASA put Neil Armstrong on the moon," said Smith. Smith went on to establish Smith Group Asset Management, the fund's subadvisor. He is still CEO.
Risk control is as vital to success on Wall Street as it is in space exploration, he says. "One thing that sets us apart from many peers is that we focus on risk management first," Smith said.
Excess risk can cause volatility that shakes up shareholders and knocks a fund out of the ranks of best mutual funds.
The fund's managers achieve a balance of outperformance plus low risk despite running a concentrated portfolio. The fund had 36 holdings as of Dec. 31. The number of holdings typically ranges between 35 and 45.
How This Fund Controls Risk
To control risk, the fund aims for sector diversification. It also targets underweights in individual holdings. Individual stock weights in the fund tend to be 2% to 5%, Brim says. In contrast, some S&P 500 holdings are above 5%. Some constituents of the Russell 1000 Growth Index, the fund's bogey, have weightings above 10%.
"Our most important risk control is the price we pay," Brim said. The fund's forward estimated price-earnings rate was 21 as of Dec. 31. The S&P 500 was fractionally higher, according to Morningstar.com. The Russell was 30 as of Jan. 14.
Pfizer's Prognosis
How do Growth Equity managers hope Pfizer will help lift this portfolio into the ranks of the best mutual funds?
Growth Equity opened its Pfizer stake in 2021's fourth quarter. "We believe that Pfizer did benefit greatly from Covid-19 in terms of its vaccine," Olsen said. As the virus mutates into new variants globally, the vaccine "may have a longer tail for producing revenue and earnings than originally anticipated."
There is more to like about Pfizer, Olsen says. Pfizer makes Paxlovid, an antiviral treatment of patients who have contracted Covid-19. That medicine will contribute to Pfizer's "favorable earnings picture going forward," Olsen said.
And there's steady growth from Pfizer's non-Covid-related products, too. The fund team is looking for the revenues of that base business to grow 6% annually through 2025, Olsen says.
How AutoZone Helps Drive This Fund
How can AutoZone, a seller of car repair parts, help Growth Equity remain among the best mutual funds? The global computer chip shortage helps drive AutoZone, as the supply of cars for sale shrinks. "As people are more reluctant to buy new cars, they will hold onto existing cars longer," Olsen said. "They'll need more maintenance." Car owners who perform their own maintenance rely on parts retailers.
Olsen added, "And AutoZone has done a good job of improving its commercial business. They've improved parts delivery to repair shops."
Olsen said, "With the overall backdrop in auto sales, AutoZone is a name we're very excited about."
What Growth Equity Sees In Target
Pfizer and AutoZone have traits that CAN SLIM investors look for in stocks. Pfizer has an IBD Composite Rating of 97. AutoZone has an 85.
A Composite Rating of 90 means that a stock is in the top 10% of all stocks on a number of technical and fundamental factors, including both price performance and earnings. The best way to use the Composite Rating is to watch for stocks that have 90-plus scores and are forming bases or are in follow-on buy areas. That way, you spot the best-positioned stocks before they start big price runs. Look up a stock's Composite Rating at IBD Stock Checkup.
But Target has a weak Composite Rating of 67. What does the Growth Equity team see that it likes? How can Target help this portfolio stay in the winners' circle of best mutual funds? "They stumbled early with their e-commerce efforts," Olsen said. "Then they decided to revamp and figure out how to do it properly."
Target introduced a one-day sale to compete with Amazon.com's Black Friday and Cyber Monday sales.
Target has also benefited from letting customers make purchases online, then pickup goods in stores. "They've driven a lot of traffic into stores from that," Olsen said. "They're well-positioned going forward."
Earnings per share are expected to grow 40% in 2022, according to analysis by MarketSmith.
Pfizer EPS is seen soaring by 85% this year. AutoZone is seen revving up by 15%.
By The Numbers: One Of The Best Mutual Funds
Delaware Growth Equity 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 is poised to be a repeat winner in the next Awards compilation thanks to outperformance in 2021, 38.8% vs. 28.71%. In this young year going into Thursday, the fund is down 8.52% vs. a 4.84% decline for the big-cap bogey.
Follow Paul Katzeff on Twitter at @IBD_PKatzeff for tips about personal finance and actively run portfolios that consistently outperform and rank among the best mutual funds.
