By Michael Brush
Investing is a tough game. That’s why so many mutual funds lag behind their indices.
So when you find a fund with a great record, it pays to investigate what the fund managers are doing — to learn some lessons.
The American Century Focused Dynamic Growth Fund /zigman2/quotes/206555329/realtime ACFSX +0.17% fits the bill. The $2.8 billion fund beats its Russell 1000 Growth Index by over 6 percentage points annualized over the past three and five years, according to Morningstar . It outperforms its large-growth category by 8.6 percentage points annualized over five years. It has a reasonable 0.65% expense ratio.
The fund is co-managed by Prabha Ram, who I recently caught up with. Raised in India, Ram came to the U.S. as a teaching assistant at the University of Maine, where she earned a master’s degree in computer science. She went on to receive an MBA at the Wharton School at the University of Pennsylvania. Ram and three other portfolio managers have led this fund since 2016.
Here are the five key takeaways, with examples of specific stocks.
1. Own companies that can “land and expand” in big markets
Even though we’ve been in the digital age for years, many small companies still do much of their business on paper. Bill.com /zigman2/quotes/215406166/composite BILL -1.22% wants to change that. The company was founded by CEO René Lacerte, who in the late 1990s started the online payroll company PayCycle, which was acquired by Intuit.
Bill.com helps small companies go digital in accounts payable and receivable payments. But that’s just the start. Once inside a company, Bill.com digitizes other areas like cash and expense account management.
Bill.com “lands and expands” at clients, but it also uses their business partners to create a network of leads.
“Every vendor is a network member, even if it is not a Bill.com customer,” says Ram. This network has about 2.5 million members. Bill.com also gets prospects from its partners, including Bank of America /zigman2/quotes/200894270/composite BAC -1.74% , JPMorgan Chase /zigman2/quotes/205971034/composite JPM -6.15% and American Express /zigman2/quotes/203805826/composite AXP -2.82% . Sales grew 45% in the first quarter.
Founder-run companies such as this one are worth considering because they often outperform.
2. Seek out innovators
Ram’s portfolio contains obvious innovators, including Tesla /zigman2/quotes/203558040/composite TSLA +1.75% , Amazon.com /zigman2/quotes/210331248/composite AMZN +0.57% and Alphabet /zigman2/quotes/202490156/composite GOOGL +0.64% , her top three positions. Let’s look beyond technology — to beer.
Back in the 1980s, Boston Beer founder Jim Koch began taking share from beer giants Anheuser-Busch InBev /zigman2/quotes/209225053/composite BUD +2.20% and Heineken /zigman2/quotes/206351165/delayed HEINY +1.91% by rolling out successful “craft” brews, starting with Samuel Adams. Koch helped invent the craft brew category, essentially taking the country back to pre-Prohibition days when the U.S. had hundreds of regional breweries making more flavorful beers for local tastes.
Boston Beer stock did very well, but then it stalled during 2015-2017 as beer sales overall went flat. In response, Boston Beer helped put a new category on the map — with its Truly Hard Seltzer brand rolled out in 2106. It remains one of the leading hard seltzers.
“We were drawn to the company because of its history of innovation,” says Ram, referring to her fund’s early position from the second quarter of 2016. “The stock was doing poorly because the beer market was flattening, but they were coming up with Truly Hard Seltzer. Truly was more successful than we anticipated. It created a new category.”
This penchant for innovation at Boston Beer has helped keep Ram’s fund in the name. Other successful Boston Beer brands include Twisted Tea, Angry Orchard and Dogfish Head.