Active managers who beat their indicators are a rare breed. Those that can consistently beat the S&P 500 are even rarer.
Anne Holcomb, director of research and co-portfolio manager of the $10.3 billion T. Rowe Price US Equity Research Fund (ticker: PRCOX), is in that exclusive club, having outperformed — along with a team of about 30 research analysts — the index S&P 500 over the past five years on an annual basis.
US Equity Research is a Morningstar Five-Star Gold Medal fund. It has no load and charges a low annual fee of 0.45%. Year to date, it’s up 18.6%, versus the S&P 500’s gain of 15.5%. The fund outperforms the broad market and Morningstar peers on a one-, three-, and five-year basis. Over the past five years, the fund has returned 12.3% versus its peers’ average return of 10.1% and the S&P’s gain of 11%. These wins put US Equity Research in the top 9% of its peers.
The fund’s strategy is two-fold. Individual portfolio analysts conduct deep, bottom-up fundamental research to find stocks in their industry coverage areas and overweight their top picks, while Holcomb and her portfolio managers, Jason Polone and Jason Nogueria, maintain strategic oversight.
US Equity Research’s industry weights are similar to those of the S&P 500, and analysts get a representative segment to manage, overweighting preferred names and selling less favorable stocks to buy others. The weighting differences are slight, with the total portfolio limited to being over or underweight by 1% against the index, but it is enough to make a material return difference.
Analysts may own a handful of non-S&P 500 large-cap stocks, although the weight of the entire non-S&P 500 portfolio is limited to 10%. It currently stands at 4.5%. Sometimes US Equity Research owns names before adding them to the index. A recent example is Lululemon Athletica (LULU). According to Holcomb, the fund held Google (now Alphabet [GOOG]) for approximately half a year prior to the company’s inclusion in the S&P 500.
“That can be a good source of relative performance,” she says, since a company’s stock price often gets a bump when the stock is added to an index because funds that track the index have to add the name. Portfolio managers work closely with analysts in scrutinizing market exposure, adjusting position sizing as needed, based on the risk profile of both individual investment sleeves and the entire portfolio.
“Every analyst has to understand what’s different in their space, and what makes a stock work within their space,” Holcomb says. “Oh my God, what might occur the following year? That’s what we’re laser-focused on as portfolio managers and research managers.” Holcomb was appointed co-manager and director of research in 2015, but has been involved with the fund since its founding in 1994 by William Stromberg, who later served as CEO of T. Rowe Price, and Richard Whitney. She says their reliance on analyst picks — with research directors providing additional accountability — remains intact.
Holcomb and her co-managers oversee the distribution of active weights in the portfolio as well as the risk profile of each wrapper, including subsectors, taking into account the overall style of the fund, factor and sector allocations to ensure that the entire portfolio shades the benchmark. These risk-related measures allow US equity research to produce higher risk-adjusted returns versus peers, according to Morningstar.
“It assists in focusing on our analysts’ primary task, which is selecting stocks within their specific domain of expertise,” the spokesperson explains. “Over the past 24 years, this has resulted in consistent relative returns.”Holcomb credits this year’s strong performance to the team’s stock selection, an impressive feat, given that the S&P 500’s rise was driven by a handful of tech names. The overweight of technology stocks like No. 3 Nvidia (NVDA) has undoubtedly helped US equity research, but it says the fund’s gains have been broad-based.
“I doubt that there was ever a year when more than 90% of our analysts outperformed their own benchmark. It’s truly amazing.”Since 2018, the fund has owned Nvidia, and according to Holcomb, the analyst continues to have a “very favorable” opinion of the premium GPU maker. She credits how analysts’ deep research leads them to uncover divergent insights or viewpoints before the market does. The analyst expects the company’s moat to expand as it enters autonomous driving and other markets, suggesting it has more room to grow.
US stock research has also risen this year due to an overweight in FedEx (FDX) stock. It notes that the analyst noted the valuation disconnect between FedEx and its competitor United Parcel Service (UPS). FedEx improved some operations and capital allocation, while Yellow Freight’s bankruptcy boosted FedEx’s shipping business. She says another superior name in transportation, Old Dominion Freight Line (ODFL), is gaining market share and has improving margins and a strong management team.
Monster Beverage (MNST), also overweight in the fund, outperformed other consumer goods companies, even as inflation pressured multiples for most beverage makers, including Monster. The company has increased profit margins by raising prices and reducing supply chain costs, while demand for energy drinks is expected to remain strong.
Geopolitical issues, inflation fears and interest rate concerns are likely to keep investors on their toes through the end of the year after leading to market distress in October. Investor pessimism and market volatility can lead to mispricing of stocks, Holcomb says, giving America’s nimble equity research team opportunities to add new names or adjust portfolio weights.
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