Best Mutual Funds: New Manager, Same Strategy

What makes T. Rowe Price New Horizons (PRNHX), run by Joshua Spencer, one of the best mutual funds? A lot of the credit goes to the fund’s eye for companies that control their own destiny.


Those are the companies that take market share from rivals and generate growth that investors can rely on. And they’re the kind of company that has turned $28.1 billion New Horizons — run by Spencer since March 31 — into a winner. According to data from Morningstar Direct, the portfolio ranks No. 2 among U.S. diversified stock funds over the 10 years ended Dec. 31, 2019. It ranks No. 4 over the 15 years ended Dec. 31, 2019. And it ranks No. 1 over both periods among its midcap growth peers.

Further, the fund is an IBD Best Mutual Funds Award winner for having outpaced the S&P 500 in 2018 and in the three, five and 10 years ended Dec. 31, 2018.

And the fund is likely to make a repeat appearance in the Best Mutual Funds Award winners’ circle. Its 37.71% gain through Dec. 31 was well ahead of the S&P 500’s 31.49%.

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One key question for Spencer is how he plans to keep the fund among the industry’s marquee names? Another key question is what changes, if any, is he instituting?

Spencer, who is 46 years old, discussed those points and other aspects of his approach to investing in a talk with IBD from his office in Baltimore.

Best Mutual Funds: Aiming For Innovators

IBD: You seek innovative companies, which as your fund’s name says are exploring new horizons. What else do you look for?

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Joshua Spencer: We look for companies with durable growth prospects. And part of being innovative means companies that can drive their own growth without relying on macroeconomic conditions to do so. It’s important to us that companies control their own destiny.

IBD: How do companies do that?

Spencer: Controlling your own destiny is tied to having a strong balance sheet. We want companies that are able to invest across different time periods. They can go through good times and bad times. If they invest in R&D, have good product pipelines and good people, that allows their growth to be durable.

It’s a holistic approach. We want companies that control their own destinies with strong growth, strong management, good long-term prospects.

Will Spencer Change This Fund’s Winning Formula?

IBD: Where do you look for opportunities?

Spencer: We focus on changing industries and sectors with lots of innovation — areas like technology, health care and biotechnology. We look for innovation that impacts classic industries.

IBD: Since taking charge of the fund, how similar is your investment strategy to your predecessors’?

Spencer: Very, very similar. I’ve kept it almost totally intact. I’ve been at T. Rowe Price 15 years. I worked closely with my immediate predecessor, Henry Ellenbogen, and his predecessor, Jack Laporte. Both focused on companies with durable competitive advantages and strong growth prospects. I’ve maintained that focus.

Can Dexcom Help This Portfolio Remain Among The Best Mutual Funds?

IBD: Is Dexcom (DXCM), whose glucose monitoring system doesn’t require a patient to pierce his or her skin repeatedly for blood, the sort of innovator you’re looking for?

Spencer: Yes. They make an implantable monitoring device and have created a much better system for people with diabetes to monitor their insulin in a much less invasive way than with needles. We’re seeing widespread adoption of their solution.

This will be a favorable tailwind for years.

How StoneCo Beats Legacy Rivals

IBD: Why have you built your share count in StoneCo (STNE), the Brazilian payments processor, over the past year or so?

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Spencer: They are a big market share gainer. They’re much more entrepreneurial than the incumbent legacy banks. Their customer service is much better.

They provide local merchants with the equipment and network that lets them accept credit cards and other forms of payment. They also offer merchants software to deal with payroll and taxes. Their growth has a long way to run before it runs out of steam.

Booz Allen Hamilton’s Expertise Is Cybersecurity

IBD: After trending higher through early September, Booz Allen Hamilton (BAH) has wobbled sideways. Is there a problem with the stock?

Spencer: This is an example of technology in other areas of the economy. They work with a lot of three-letter government agencies ), especially in defense areas. Their specific area of expertise is cybersecurity.

Cybersecurity threats are increasing, which has powered strong performance for this stock. Their treading water is not a sign that anything has diminished in our view. They’re poised for strong performance in 2020 and beyond.

Why This Top Mutual Fund Added To Veeva

IBD: What made you boost your share count in Veeva Systems (VEEV) in the past year?

Spencer: They have software for pharmaceutical companies’ sales reps, who must keep a log about what they discuss with doctors. It’s a highly regulated industry.

Veeva also has software called Vault, for keeping track of data in clinical trials. They’ve grown rapidly and gained a lot of market share in that market.

They’re developing more products they can use within the pharmaceuticals industry, and they’re looking at other highly regulated industries like agriculture, consumer products, chemicals, fragrances, things of that nature.

Similar to Booz Allen, they’ve sort of treaded water a little over the past few months. That’s given us a chance to add to our position.

Pros And Cons Of Palomar Holdings

IBD: What made you add Palomar Holdings (PLMR), a specialty property insurer, to the portfolio not that long ago?

Spencer: They came public (in April). They provide earthquake insurance. And they’re seeing more demand, and not just in California.

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They have good distribution through a network of agents. But they’re a middleman. They offload the ultimate risk to reinsurers.

They came public at an attractive valuation. There’s more to go. But I would also say it’s more fully valued than some of our other holdings at this point.

Paylocity Has Room For Margin Expansion

IBD: What’s your outlook for Paylocity (PCTY)?

Spencer: They started with payroll software. Payroll software is critical. Then clients add software for other functions once they have a relationship with Paylocity.

So clients add human resources, performance reviews, health care, managing employees’ benefits. They added things that small- and medium-size businesses might need. Like Veeva, there’s room for further margin expansion.

Why One Of The Best Mutual Funds Likes This French Stock

IBD: Why do you like France’s Sartorius Stedim Biotech rather than other makers of medical systems?

Spencer: They make biotech consumables like vials and plastic bags. Their products are single-use, so that provides a steady stream of recurring revenues.

And their products often get specified into the manufacturing process for drugs. Once regulators specify that such-and-such bag must be used when a specific drug is made, it’s difficult to change that.

And their products are relatively low priced. So if they take modest price increases each year, there’s not much pushback from customers. The stock is somewhat expensive, but growth will justify the price as years pass.

Follow Paul Katzeff on Twitter at @IBD_PKatzeff for tips about personal finance and active managers of the best mutual funds who outperform the market by picking top-performing growth stocks.


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