Mid-Cap Growth Fund Gets Ahead With Pick and Shovel Stocks
Ron Zibelli isn’t afraid to hold a stock.
Early in his career, he invested in
(ticker: CSCO) as a young company and saw the stock take off for almost a decade, a bet that still influences its investment approach today. And many choices in its $6.2 billion
Mid Cap Growth Invesco Discovery
(OEGAX) are graduates of the small cap growth fund he also manages.
The portfolio co-manager’s ability to identify strong early stage companies and stick with them gives his team an edge over the competition, which is evident in the fund’s performance.
Mid Cap Growth is a Morningstar Bronze Award-winning fund, with a below-average expense ratio of 1.03%. It beat the Russell Mid Cap Growth Index and its mid-cap growth category over three and five years, with a five-year annualized return of 14.4%. A shares carry an entry fee of 5.50%.
Zibelli says his investment in Cisco in the 1990s laid the foundation for how he manages portfolios today. In 1991, he was a technology analyst and director of research for Princeton Bank & Trust, a boutique private bank that was eventually acquired by Chase (later acquired by JP Morgan). He had recommended buying Cisco Systems, a relatively new company at the time. It was a leader in an emerging market called internetwork, which eventually enabled the creation of wide area networks that connect geographically distant computers. The shares were trading at an adjusted price of 20 cents, even though revenue was up more than 100% year over year.
His team was still holding Cisco five years later, in 1996, when Zibelli was transferred to a new job. Cisco eventually peaked at $82 per share in 2000. Seeing Cisco’s success over the years, even though it no longer managed that original portfolio, had a significant influence on its approach to investing. .
“The experience of recommending this stock and witnessing the massive impact on portfolio value had a huge impact on me in formulating my investment philosophy,” says Zibelli, 62.
He is now similarly looking for companies that are at the forefront of new markets or are leaders in their fields. They must also have strong management teams and considerable potential to outperform for long periods of time.
New York-based Zibelli started the mid-cap growth strategy in 2010 when he was at OppenheimerFunds and co-manages it with 47-year-old Justin Livengood. The two first worked together at Merrill Lynch Investment Managers in the early 2000s and both joined Invesco. in 2019 when the company acquired Oppenheimer.
Beyond strong management teams, the pair favors business models with strong secular growth potential, such as underwriting models or oligopolistic companies. The duo also like businesses that cater to the needs of a wide range of customers, which is like investing in the pick and shovel suppliers to the gold mining industry of yore.
The co-managers’ experience in small-cap growth investing – Zibelli also manages the $3.7 billion
Discovery of Invesco
funds (OPOCX) – gives them fertile ground for mid-cap growth picks. Many of the mid-cap fund’s holdings are companies they found when the companies were still small-cap companies, giving the team a competitive edge over its peers, Zibelli says.
An example is fund position #7,
Monolithic power systems
(MPWR), a company that creates semiconductor-based power systems that executives have known about since the days of small caps.
“This is a company that sits down with its customers and comes up with creative solutions to their pain points,” says Zibelli.
|1 year||5 years||10 years|
|Mid Cap Growth Class||-9.1||13.0||12.0|
|Top 10 equity holdings|
|Company / Symbol||% actives|
|Synopsis / SNPS||2.5|
|Zebra Technologies / ZBRA||2.3|
|MSCI / MSCI||2.3|
|Idexx Laboratories / IDXX||2.1|
|KKR / KKR||2.1|
|Former Dominion/ODFL freight line||2.1|
|Monolithic power systems / MPWR||2.0|
|SVB / SIVB Financial Group||2.0|
|Trimble / TRMB||2.0|
Note: Holdings as of January 31. Returns through March 7; five- and ten-year returns are annualized.
Sources: Morningstar; Invesco
Monolithic is a fabless chipmaker, meaning it designs chips but outsources much of the manufacturing to another company. It added its own manufacturing capacity a few years ago, a prescient move given the current global chip shortage. This allowed the company to expand and prepare for its next wave of growth, Zibelli says. The fund first bought Monolithic shares in 2012 around $20; it is currently trading around $395.
Holding no. 4, a veterinary diagnostics company
(IDXX), has been in the portfolio for about 10 years. The veterinary industry has grown significantly, especially as the Covid-19 pandemic has prompted many people to adopt pets. Before the pandemic, the industry grew 5-6% a year, but it’s now running at 8-9%, Livengood says, and should stay at high levels for some time.
“Once you have a new puppy or kitten, you can’t turn off annual or semi-annual visits to the vet,” he says.
Compared to competitors, Idexx has capitalized on creating newer, faster health tests that can be run in the vet’s office, and has created more sophisticated lab tests that weren’t available five to ten years ago. years, like some urine tests. , says Livengood. And he’s managed to retain vets, he adds, another competitive advantage.
In the “pickaxes and shovels” category is
SVB Financial Group
(SIVB). The team has held the stock on and off since the bank was a small cap and bought it back in early 2021. Livengood says it is the number one bank in the tech sector, lending to many private equity and venture capital firms in the sector. In 2021,
increased deposits, loans and income by more than 30% over the previous year, he adds. The bank should also benefit when interest rates eventually rise.
“We’re helping to grow the whole venture capital economy, if you will, by owning SVB,” he says.
Recently, growth stocks and related funds have been shaken as markets widely expect the Federal Reserve to raise interest rates this month. Mid Cap Growth is down 24% since the start of the year. The recent commodity price spike is another concern; co-managers assess their portfolio for potential impacts.
It’s an ever-changing situation, Zibelli says, but the types of companies his fund owns — with strong management teams, business models and balance sheets — are expected to outperform.
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