You don’t have to be an Olympic gold medalist to beat the stock market. But it sure helps.
How so? Athletes preparing for the Olympics must have the discipline to train for years. This translates directly into the “buy and hold” concept that wins in the stock market — as investor greats like Warren Buffett have taught us.
It also helps explain why the Eaton Vance Atlanta Capital Focused Growth Fund
has outperformed the U.S. stock market nicely. The fund is run by Joseph Hudepohl, who won gold medals for the U.S. in swimming events at the 1992 and 1996 Summer Olympics.
The fund also beats its large-cap growth category rivals by a wide margin — more than four percentage points annualized over the past five years, according to Morningstar Direct. The fund also has outperformed over the past decade. That’s a big deal when most money managers regularly lag the market.
Hudepohl, who has managed the fund since 2015, attributes its outperformance to a buy-and-hold approach that parallels his Olympic training. Thinking about how to train for four years for the next Olympics teaches you to think about investments in terms of years, he says.
Hudepohl isn’t kidding about this. The fund has an astonishingly low turnover rate of 7% a year, compared to an average of 58% for all growth funds, Morningstar reports. “Find a great business and compound with it over time,” is how Hudepohl sums it up.
Olympic training also taught him to manage his emotions, another quality of successful investors. Too many people get shaken out by fears during downturns, or they chase stocks because of FOMO in melt ups. In the markets, as in grueling Olympic training “you experience good times and bad times in the daily grind.” Knowing how to stay unemotional through each helps you survive in both settings.
Here are five strategies Hudepohl says he uses to help beat the market, with stock examples. Given the fund manager’s long-term approach to investing, all of these names seem buyable now, particularly on weakness.
1. Look for stable earnings growth
Companies that produce consistent and reliable earnings growth tend to outperform over time, and they hold up better in hard times. He prefers an earnings history of ten years, for starters. Consistent earnings growth helps protect capital supporting a core rule of his, which is “don’t lose money.”
Of course, most people say they want consistent and stable earnings growth. But what are the company qualities that help you find it? We need to drill down on this. Here is what to look for, and what to avoid.
2. Look for recurring revenue
This often comes from subscription-based business model. For example, about 80% of the revenue at fund-holding Gartner
tech research and consulting business, comes from subscription services.
which sells consumable products used in medical testing, diagnostics and research, gets about 75% of its sales in recurring revenue. You might have used their Covid tests during the pandemic. Danaher is the fifth-largest position in Hudepohl ‘s fund.
3. Look for pricing power
This is also a reliable source of steady sales growth. Here, Hudepohl cites Verisk Analytics
which offers data analytics to property and casualty insurers. As actuaries, insurers are highly data-driven. Many rely on Verisk to price policies, predict potential losses, manage risk and handle compliance. Insurers are so data dependent that Verisk is able to impose regular price hikes.
which sells connectors used in electronics, is another key fund-holding. Nearly every electronic device – including the computers powering AI – need connectors. This helps Amphenol with pricing power.
All of these companies in one way or another have protective moats, which also contributes to earnings stability.
What areas of the market should be avoided in order to keep your portfolio in consistent growth companies? Cyclical industries. Hudepohl has zero exposure to energy, for example, and to utilities because of that industry’s regulated growth rate. Less than 5% of the portfolio is in consumer cyclical names, compared to a category average of 14%, Morningstar reports.
4. Look for reasonable valuations
Hudepohl is an old-school “GAARP” investor. This stands for growth at a reasonable price. It’s a style of investing that was in the headlines a lot back in the 1990s. He developed his investing chops then during a long stint at Goldman Sachs (GS), where he specialized in quality growth stocks.
You might be surprised at what Hudepohl considers to be reasonably valued now. Alphabet
shares still look reasonably valued, he says. Those two stocks trade at a modest p/e premiums to the S&P 500
which seems acceptable given their growth prospects, moats, and dominance of search and cloud services. Both are top-five portfolio positions.
Hudepohl is not invested in either of these companies because of their AI buzz. “It is too early to determine the ultimate winners and losers in AI,” he says.
5. Take concentrated positions
Many mutual funds hold 50 stocks or more, and the top position size comes in at 2%-3% of the overall portfolio. The idea here is to reduce position size risk, to remove the power of a single stock to hurt results by blowing up.
Hudepohl is having none of it. His portfolio usually has around 25 names. The two biggest positions, Visa
and Alphabet, each reflect more than 7% of the portfolio as of April 30, the fund’s most recent reporting date. The next four largest, Thermo Fisher Scientific
Microsoft, Danaher and Mastercard
are all 5% positions or more.
The large position size is a result of Hudepohl’s high conviction, based on extensive research. Plus, unlike a lot of managers, Hudepohl does not necessarily trim on stock strength. He does have a maximum position size of 10%. Anything larger and he trims the position.
“Part of being a good money manager is focusing on fundamentals,” he says. “As long as they have not changed, we are OK.”
Michael Brush is a columnist for MarketWatch. At the time of publication, he owned GOOGL and MSFT. In the past 10 years, Brush has suggested MA, GS, GOOGL and MSFT in his stock newsletter, Brush Up on Stocks. Follow him on Twitter @mbrushstocks.