Kiplinger\'s Personal Finance 02.2020

30 KIPLINGER’S PERSONAL FINANCE^ 02/2020

INVESTING

index over the course of a full market

cycle, Gershuny says. And even in a

strong bull market, the fund has per-

formed admirably, posting an annual-

ized return that trails the benchmark

by only 0.6 percentage point over the

past decade, with 14% less volatility.

5

T. Rowe Price Diversified Mid-

Cap Growth Growth-stock in-

vestors, like baseball players, can be

tempted to swing for the fences. But

with investing, a strikeout means

more than a trip back to the dugout–

because an investment must return

100% to recoup a 50% loss. Don Easley

and Don Peters, who helm T. Rowe

Price Diversified Mid-Cap Growth,

are happy to pass up the chance to

go deep in favor of frequent base hits.

That means avoiding big bets. The

fund holds a broadly diversified port-

folio of more than 300 stocks, with no

more than 1.6% of assets dedicated to

any single name. The managers home

in on steady growers—firms they be-

lieve can consistently increase earn-

ings at double digit growth rates and

that have track records of sustaining

or boosting return on invested capital

over full stock market cycles. But they

don’t want to overpay. Stocks in the

portfolio trade at 20 times estimated

earnings for the next 12 months, on

average, compared with a multiple

of 27 for the Russell Midcap Growth

index. The managers will swoop in

when stocks on their radar get cheap.

When stocks slid in late 2018, the fund

picked up discounted shares in soft-

ware firms Coupa Software (COUP),

Okta (OKTA) and Paycom Software

(PAYC). The firms serve large, grow-

ing markets and operate subscription-

based businesses that should generate

steady profits, says Easley.

Results for the fund have been con-

sistent. It has never trailed more than

55% of peer funds in a given year, or

led more than 86% of them. But it has

beaten the average mid-cap growth

fund in eight of the past 10 years. ■

creasingly relevant products or ser-

vices, a dominant position among peer

firms and capable execs running the

show. Companies are also evaluated

on environmental, social and gover-

nance criteria, and some businesses,

such as those commanding significant

revenues from alcohol, tobacco or fire-

arms, are excluded altogether. Finally,

the managers project a stock’s growth

prospects against potential risks over

the next three years, favoring firms

with a narrow range of potential in-

vestment outcomes that trade below

the managers’ assessment of the com-

pany’s true worth.

Gershuny is bullish on Burlington

Stores (BURL), a business he says has

historically been the “ugly stepchild”

among discount retailers. But Gers-

huny likes the direction of the com-

pany under new CEO Mike O’Sullivan

and sees an opportunity for the re-

tailer to continue to strengthen its

brand while expanding profit margins

and boosting sales at existing stores.

There haven’t been many cloudy

days for Gershuny and Keith, who

took the helm in 2008—about a year

before the onset of a record-long bull

market. But the fund has done its job

during scattered showers, handily

outpacing its bogey in 2011, 2015 and

2018—all tough years for stocks. This

propensity to lose less when things go

downhill should help the fund best the

60-stock portfolio. For example, the

managers recently upped their expo-

sure to top-10 holding Mid-America

Apartment Communities (MAA).

Tugman says the real estate invest-

ment trust, which owns apartment

buildings in the Sun Belt, is less sus-

ceptible to falling rents or restrictions

on increases than are firms operating

in big, coastal cities.

The fund’s defensive posture can

hamper returns when stocks are hot

but holds up when stocks hit the skids.

The fund fared better than its bench-

mark when stocks slid in December

2018 and in the dismal second half of

2015. Over the past decade and a half,
      the fund delivered an 8.2% annualized
      return, less than a percentage point
      behind the index, but with 17% less
      volatility. In fact, the fund provided
      a smoother ride than 99% of mid-cap
      stock funds over the period.

4

Parnassus Mid Cap A member

of the Kiplinger 25, the list of

our favorite no-load mutual funds,

Parnassus Mid Cap invests in a mix

of midsize companies with growth

and value characteristics. From the

800 or so stocks in the fund’s bench-

mark Russell Midcap index, the team

behind the fund, led by Matt Gershuny

and Lori Keith, whittles the choices

down to about 40 high-quality stocks.

To be considered, firms must boast in-

TRY THESE FUNDS ON FOR SIZE

Just Right

Each of these mutual funds takes a unique approach to investing in midsize companies.

Consider adding one of them to boost your allocation to this market sweet spot.

Fund Symbol 1 year 5 years*

Average

market cap

(billions)

Expense

ratio

Baron Asset Retail BARAX 22.0% 12.8% $16.8 1.30%

Fidelity Mid-Cap Stock FMCSX 12.5 8.8 8.8 0.67

Janus Henderson Mid Cap Value T JMCVX 13.9 7.6 10.0 0.83

Parnassus Mid Cap PARMX 15.2 9.7 13.2 0.99

T. Rowe Price Diversified Mid-Cap Gr PRDMX 23.4 12.4 14.7 0.83

Index

RUSSELL MIDCAP INDEX 15.0% 8.9% $14.1

As of November 30, 2019. *Annualized. SOURCE: Morningstar Inc.

Total return

CONTACT THE AUTHOR AT [email protected].