Avoiding fads in the stock market isn’t easy. Who doesn’t want to own all the companies with ties to artificial intelligence, electric vehicles and cryptocurrencies? But those who simply believe the hype and ignore fundamentals do so at their own peril, says the manager of one of the best mutual funds.
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Savvy investors know it’s smart to identify companies that can be winners from long-term trends without buying stocks at the wrong time. Having a relatively small and concentrated portfolio can also help lead to solid returns.
That’s the approach that the Jensen Quality Growth fund (JENSX), one of IBD’s top funds for 2023, takes to buying and holding stocks. Jensen Quality Growth, which was up nearly 15% as of early December and has outperformed fellow large blend funds as well as the S&P 500 over the past three and 10 years according to Morningstar, typically owns between only 25 and 30 companies in the portfolio.
Jensen takes a team approach to managing the Quality Growth fund and the other funds it runs. The firm, with nearly $13 billion in assets under management, has been running the Quality Growth fund since 1992. Allen Bond, head of research at Jensen, told IBD this depth of experience gives Jensen a leg up on some rivals who haven’t lived through as many market cycles.
IBD spoke with Bond about expectations for the broader market as well as some of the fund’s top holdings. Here, edited for length, is what Bond told us.
Best Mutual Funds: Looking Forward To 2024
IBD: What is your macro outlook for the markets in 2024?
Allen Bond: The current consensus is that things are good. The rate of inflation is moderating. That means the Federal Reserve is probably done raising rates. So it’s kind of a “risk on” environment for stocks. It looks like the Fed might even achieve a soft landing. I don’t know if they’ve ever done that before.
IBD: What happens if the Fed can’t navigate a soft landing and the economy actually slides into a recession?
Bond: We hear people talking about that. But even if there is a recession, it’s likely to be mild. Big Tech stocks will probably be insulated.
IBD: What are Jensen’s thoughts on artificial intelligence? Does the firm own any AI stocks?
Bond: AI does look like it’s going to be a pretty good sector for profits for a long time. It’s going to be another leg to the stool for growth. There is going to be a need for more computing power. Nvidia (NVDA) is a big beneficiary of that. We don’t own it, but what we do own are Microsoft (MSFT) and Alphabet (GOOGL). Microsoft’s partnership with OpenAI makes it one of the leaders in getting AI out to the market and general public. Alphabet’s Google has its own efforts.
Basically, these big companies with the resources to support these investments are really well positioned to launch their own AI platforms and get them licensed for people that want to use AI but don’t want to go through the process of building their own platforms. Microsoft and Google are the early movers and they probably will have an advantage.
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IBD: Are there any companies Jensen owns that have exposure to AI but the market isn’t focused on as much?
Bond: One that’s interesting is Accenture (ACN), the IT consulting firm. They made a big investment in AI and their way of thinking about it is they need to work with businesses to help them enable AI solutions for all their workflows. There’s a lot of good potential for growth there. Accenture has a really good track record and is well positioned with large businesses. This is another growth opportunity for them.
IBD: Any concerns about the economy and market heading into next year?
Bond: The yield curve is still a burden. It’s inverted and that has been a really powerful recession indicator since 1955. The lag between when the yield curve inverts and a recession can be up to two years and we’re not two years into when we first inverted so we think we still need to keep our eyes on that.
The other thing that’s interesting is that even though the rate of inflation is moderating, we’ve seen research that suggests that once you have an initial wave of inflation, there’s usually a second wave. So underneath the surface, there could still be some cracks in the economy that we’re going to monitor into next year.
Eyeing The Fed’s Next Move
IBD: Do you think the market is currently overestimating the chances of many rate cuts in 2024?
Bond: The expectation for rate cuts has been pretty premature. Now our investment strategy doesn’t focus a lot on what the Fed’s going to do, but what I would say is it appears the Fed has its eyes clearly on the labor market. And the number of jobs and positions available are still higher than the number of people looking for jobs. As long as that’s the case, you can have inflation.
I think the Fed will pause for awhile unless something changes. But another big thing that’s happening right now is we’re hitting this demographic wall in terms of the workforce with more people retiring and creating a decline in the workforce at the same time there are all these job openings.
IBD: Are there other risks that you worry about that people aren’t paying as much attention to as they should?
Bond: We had a really strong GDP number for the third quarter, so that makes it a harder base to grow from going forward. I still think there is a risk of economic weakness.
There are signs that things aren’t maybe as strong on the surface as people think they are. We just haven’t seen it in earnings yet. It could be just speculative at this point, but there are indications that maybe there is a slowdown coming.
Tech Still King In 2024?
IBD: You mentioned that you still like the tech giants heading into next year, But what companies outside of that sector are you looking at right now?
Bond: Another top holding for us is UnitedHealth (UNH). (The company is) the largest managed care provider in the U.S. and they have a very broad-based business. They do traditional health care insurance and administer benefits for big businesses. They have a Medicare option, their own prescription benefit management business and a consulting business that works with hospitals. That’s a really big growth area.
This breadth of offerings is a real competitive advantage on a national scale. So it has been a great stock. They have pricing power. And that’s been a really powerful thing for them. What we really like about UnitedHealth is that they’re entrenched. They’ve got a broad range of businesses and do an excellent job managing them. Growth in health care is going to be strong for the long term and this stock is a good way to play that.
IBD: What are some other stocks you’re bullish about?
Bond: One relatively new name is KLA (KLAC). It’s a semiconductor equipment company. They make quality control and defect detection products for semiconductor manufacturing. If you have a silicon wafer and you’re going to make computer chips out of it, if that wafer is defective, those chips are likely to be worthless. So KLA helps identify defects so that companies don’t waste resources. It’s a mission critical process for semiconductor companies and KLA is a market leader.
They have been in the business for a long time. (The company) should benefit from these entrenched customer relationships, decades of accumulated knowledge. They also have a large research and development budget so they’re able to stay ahead of their competitors as well. It’s a really good way to get good exposure to growth in semiconductor manufacturing with a really high quality business. Taiwan Semiconductor (TSM), Samsung and Intel (INTC) are all top customers.
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IBD: How about one more stock that stands out to you? Are investors clamoring for more companies to buy that aren’t part of the Magnificent Seven?
Bond: Here’s one more example and a completely different business. Verisk (VRSK) does data analytics for insurance companies, particularly for property and casualty companies. They essentially operate as an industry consortium where all the insurance companies give them their claims data and Verisk aggregates it and creates analytics around it in order to help write insurance policies and estimate losses. So their data is the engine behind the insurance business. They have a dominant market share and it’s very hard for anyone else to replicate their unique data. That’s the competitive advantage. It’s a steady growth story.
IBD: It seems that both KLA and Verisk have something in common. They’re kind of like pick and shovel companies supplying products to larger industries, right? Does Jensen own any other stocks like that?
Bond: Yes, these are both companies with strong market positions. One more that’s similar is Marsh & McLennan (MMC), the insurance broker. They are this middleman in a really large marketplace for companies that need insurance or reinsurance. It’s another company where we think you can get exposure to a steady end market though a strong business with solid market share and more consistency. That’s a threshold we’re always looking for: trying to get growth and limit risk at the same time. We find companies that are exposed to good growth drivers but can do so in a way where the financial results are likely to be less volatile. We like situations like that.
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