It's tough for U.S. diversified stock mutual funds to keep pace these days with the broad market in the form of the S&P 500. The $8.2 billion GMO Quality IV Fund (GQEFX), one of the best mutual funds, is showing what it takes to outperform.
Through Feb. 28, the fund nosed out the big-cap bogey. Amid market turmoil, the GMO fund lost less ground than the benchmark, -7.74% vs. -8.01%, according to Morningstar Direct.
Tom Hancock, lead manager of the Quality IV Fund, attributes the fund's performance to its managers' appetite for growth and value stocks as well as blend equities that occupy a middle ground.
The idea is to aim for a portfolio that holds stocks that are thriving no matter which way the broad market is tilting at any one moment.
Best Mutual Funds: GARP Strategy Outperforms
Anthony Hene and Ty Cobb are co-managers of this advisor-sold fund.
The managers are mindful of valuation when picking stocks. "We buy stocks trading below fair market value," Hancock said. "The kind of value we pursue is fundamental, quality oriented."
Following multiple tracks rather than just one is a key to what makes GMO Quality one of the best mutual funds, Hancock says. "I think on that spectrum (of value to growth), the best spot is growth-at-a-reasonable-price, or GARP. We are a core stock fund. We hold some growth stocks, some value," he said. And "we tend to cluster toward the middle. So we don't have deeply discounted basket cases or the most loved high-flyers."
Savvy Mix Of Growth, Value, Blend
The growth side of the portfolio includes megacap technology names like Microsoft, Apple and Google-parent Alphabet.
"Microsoft is the largest stock in our portfolio," Hancock said. "But it is not a stock we've added to in the last year or two. It's relatively fully valued. That's the only reason you wouldn't put all of your money into it. Still, after underperforming in January and February, that's slightly less true."
The rest of the portfolio features names like Coca-Cola and Wells Fargo.
How Coke Adds Fizz To Portfolio
It's in markets like the current one that blue chip names show their worth. That diversification helps make this one of the best mutual funds. Coke is up 5.12% this year. "Coke is doing better than some peers for a couple of reasons," Hancock said. "One is that their core beverage business sells syrup, not the drinks, to bottling companies. That makes them less inflation sensitive than some food companies. Coke's input costs are relatively immune from inflation."
Hancock cites other reasons for the strength of Coke's share price. "Coke's beverage business is an area where distribution matters," he said. "E-commerce is less of a threat. And Coke is a little bit of a reopening play. A good part of their business comes form consumers drinking outside the home. More consumers are doing that as the economy reopens."
Wells Fargo is up 11.75%. "Generally, financials that benefit from rising interest rates are stronger performers in volatile markets," Hancock said. "They stand to make more money on their cash float from customers."
He added, "Also, they depend more on commercial lending than on stock trading. So they're more resilient in down markets."
How Wells Fargo Can Help One Of The Best Mutual Funds
Wells Fargo has been trading at a discount since its fake-account scheme became public in 2016, Hancock says. Shares slid last September when regulators fined the company for failing to repay customers the bank had hit with inappropriate fees and for other violations. Hancock sees a silver lining. "Post-scandal, the stock is trading at a lower multiple. Lower-multiple stocks have more of a margin of safety in a bad market," he said.
Also, in 2018 the Federal Reserve imposed an asset cap on the bank for opening millions of accounts without the consent of customers. That prevented it from growing its balance sheet, crimping profits. "We don't have a particular view on when the asset cap will be lifted," Hancock said. "But it is something that will improve. We just don't know when. So it's a positive waiting to happen."
Drug maker Merck is about flat for the year, down 0.08%. Merck's key asset is its cancer drug Keytruda. "While it is just one drug, it is versatile," Hancock said. "It has applications to other forms of cancer. And it has ability to be combined with different forms of chemotherapy." Hancock also likes Merck's Gardasil, a treatment for hepatitis C.
By The Numbers: One Of The Best Mutual Funds
The fund is poised to repeat as an IBD Best Mutual Funds Awards winner after being a Best Mutual Funds Award winner last year.
It earned that distinction by notching a 31.57% total return in 2021 vs. 28.71% for the S&P 500. That capped its outperformance over the three, five and 10 years ended Dec. 31.
Class I (GQLIX) is the share class most widely available on investment platforms, GMO says.
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