Mutual Funds

Flexibility Makes This One Of The Best Mutual Funds

Maneesh Bajaj runs an equal opportunity mutual fund. He buys value stocks as well as growth stocks. That agility is a big part of the reason his $748.9 million Brown Advisory Flexible Equity Fund (BIAFX) has been one of the best mutual funds.


His strategy includes other elements as well. He wants stocks that are, eventually anyway, fast growing. And he wants stocks whose potential is not already baked into their share prices. “We start by looking for stocks that are underpriced,” Bajaj said.

He is in no rush. “We are long term in our philosophy,” he said. “Our turnover is low. We are not traders.”

And he is confident in the names his team selects. “We are concentrated,” he said. “We hold 40 to 45 names.”

As a result, the portfolio holds growth names like Google-parent Alphabet (GOOGL) and Microsoft (MSFT). It also holds KKR (KKR), which many investors label a value stock.

Best Mutual Funds: Exposure To Alternatives

KKR is one of two managers of alternative assets that the fund owns. The other is Blackstone (BX).

“We bought KKR when they had a conversion from a partnership to a C-corporation in July 2018,” Bajaj said. KKR’s profit is on pace to hit an adjusted $3.99 a share in 2021, up more than 124% from 2020, says S&P Global Market Intelligence.

Bajaj likes KKR’s growth traits. “The last two to three years, their assets under management have more than doubled to $460 billion from $175 billion,” he said. “And we like their prospects. They are shareholder friendly. They generate a lot of cash. They have dividends. They do buybacks.”

Alphabet’s A-B-Cs For Making This One Of The Best Mutual Funds

Bajaj does not mind giving Alphabet time to let business lines mature and reach or boost profitability. The company’s main pillar, Google, is profitable thanks to its search advertising.

“YouTube was not profitable a few years ago,” Bajaj said. “But it has been scaling nicely. Now it has nearly $20 billion in revenue and is profitable.”

Waymo, Alphabet’s self-driving car technology line, is potentially very disruptive, Bajaj says. “It’s a long-term bet,” he said.

He added, “Alphabet’s cloud business is not generating operating profits. It is loss making. But we’ve seen in (AMZN) and Microsoft that cloud services are profitable when they reach scale. We expect it will be no different in the case of (Alphabet’s) cloud business.”

And the price is right. “We like the fact that when you adjust for cash on the balance sheet, the stock is not too different from the market’s multiple, but with a significantly higher growth rate,” Bajaj said.

Microsoft’s Multiyear Improvement

Microsoft has been part of Bajaj’s vision for making Flexible Equity one of the best mutual funds for years. The stock has been a core holding for years and an IBD Long-Term Leader, Bajaj says. “Businesses want to be more agile,” he added. “They want to reduce their capital intensity. They’re looking more to the cloud.” Those trends aid Microsoft’s growth, he says.

He added, “Not long ago, Amazon and Google had the lead when it came to infrastructure cloud offering. Over the last five years, Microsoft bridged that gap. Today, 95% of Fortune 500 companies have adopted Azure services.”

Bajaj said, “So Microsoft can be expected to make rapid advances in new areas like distributive computing, the Internet of Things, artificial intelligence (AI) and machine learning. Their offering goes beyond cloud services. And Microsoft has shifted its business to more recurring revenue. That leads to more predictability in financial results. For that, investors assign higher multiples to earnings.”

By The Numbers: One Of The Best Mutual Funds

Flexible Equity Fund became an IBD Best Mutual Fund Awards winner by topping the S&P 500 in 2020 and in the three, five and 10 years ended Dec. 31.

This year going into Wednesday, the fund’s 24.07% return lagged the S&P 500’s 26.49%. The fund’s large-cap growth rivals tracked by Morningstar Direct were up 21.34% on average.

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.


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