Harry Domash's Winning Investing


 Spy on Fund Managers 

Looking for stock ideas? Mutual funds are a great resource. Fund managers spend their days finding worthwhile stocks to add to their portfolios, and the SEC requires them to report their portfolio holdings every three months. Even better, Morningstar reports fund holdings in a useful format that tracks changes in each fund’s holdings compared to its previous report. To see the data, start at Morningstar’s home page (www.morningstar.com), enter your fund’s ticker in the quote box, select Portfolio, and then Holdings.

Of course, not all mutual funds are equal. In fact, only one in three funds focusing on U.S.-based stocks managed to beat the S&P 500 over the last three years. Also, since the average fund changes almost half of its portfolio annually, the timeliness of the portfolio data is important.

Finding Funds to Spy on

Thus, Morningstar’s portfolio data is most useful if you focus on funds that turn over their portfolios relatively infrequently and report their holdings relatively close to the end of each reporting period.

Since Morningstar tracks thousands of funds, how do you pick which ones to check? In my view, your best resources are funds with reasonably strong track records that are hot, meaning that they are currently outperforming the market by a substantial margin. Finally, since the U.S. economy is still the world’s strongest, it’s best to stick with funds mainly holding U.S.-based stocks.

Mutual Fund Screener

With all that in mind, I used Morningstar’s Premium Mutual Fund Screener to find U.S. stock funds that had returned at least 23% over the past 12-months (25% better than the S&P 500) and at least 13% on average, annually (15% over the S&P), over the past three years.

To improve the chances of seeing current data, I specified 30% maximum annual portfolio turnover, meaning that, on average, the fund changes 30% of its holdings in a year. I also ruled out holdings reports filed prior to December 31, 2016. Hopefully, that requirement, would limit my list to funds that had already taken the presidential election results into account.

Along those same lines, when analyzing fund portfolios, although total holdings are significant, I first look at each fund’s recent trades. Here’s what I gleaned from check Morningstar’s portfolio reports for the three funds turned up by my screen.  

Thrivent Mid Cap Stock A (AASCX)

I listed Thrivent first because its 21% annual turnover was the lowest of the bunch. Thrivent has returned 35 percent over the past 12-months and 13 percent, on average, annually over three years. Interestingly, Thrivent was the only fund that didn’t add to its holdings during its December 2016 quarter. Instead, in its only two trades, Thrivent unloaded 64% of its NVIDIA (NVDA) holdings, and lightened its position in Oshkosh Corporation (OSK) by 15%. It’s biggest holdings at December 31 were two banks, Zions Bancorp (ZION) and Huntington Bancshares (HBAN), along with Southwest Airlines (LUV).

Clifford Capital Partners Institutional (CLIFX)

Holding mostly large-cap, value-priced stocks, Clifford returned 28% over the past year and averaged a 13% three-year average annual return. Although only historically turning its portfolio 24% annually, Clifford was a big buyer recently, establishing new positions in Diebold (DBD) and Teva Pharmaceutical (TEVA), and doubling its holdings of Dun & Bradstreet (DNB) and Stericycle (SRCL). Surprisingly, Clifford didn’t sell any of its holdings in the quarter. At December 31, its biggest holdings were American Express (AXP), CIT Group (CIT), and Evertec (EVTC).

Virtus Small-Cap Sustainable Growth (PSGAX)

Virtus, which holds a concentrated portfolio of 26 growth-priced small- and mid-cap stocks,  returned 27% over the past 12-months and averaged 13% annually over the past three years. Its annual portfolio turnover is 26%. Virtus significantly added to positions in Abaxis (ABAX), Copart (CPRT) and MarketAxess Holdings (MKTX), and severely cut its UFP Technologies’ (UFPT)holdings. Its biggest holdings were Shutterstock (SSTK), Ollie’s Bargain Outlet (OLLI), and Fox Factory Holding (FOXF).

Free Mutual Fund Screener

Although I used Morningstar’s Premium screener, you could accomplish more or less the same thing using its free Basic Fund Screener. For instance, you could screen for Morningstar Five-Star rated U.S. equity funds that have returned at least 25% over the past year, and with 25% maximum turnover ratios. Rule out any index funds that turn up in your results because, by definition, they track fixed indices. You could run such a screen anytime you need new stock ideas.

As always, consider the stocks mentioned here as research candidates, not a buy list. The more you know about your stocks, the better your results.

published 3/20/17

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