The $883.3 million Nuveen Winslow Large-Cap Growth ESG Fund (NVLIX) is one of the best mutual funds. Year to date through July, it was up 19.19% vs. 17.99% for the S&P 500 and 15.00% for its large-cap growth rivals tracked by Morningstar Direct.
Lead manager Justin Kelly and managers Patrick Burton and Stephan Petersen highlight two traits that are keys to what they’ve achieved. “Our philosophy with this fund is to buy companies that generate double-digit earnings growth,” said Kelly. “We also want them to have long ESG attributes.”
ESG refers to companies that prioritize sustainable environmental, social and corporate governance policies.
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The managers’ philosophy yields top-notch results.
Best Mutual Funds: By The Numbers
Large-Cap Growth ESG became an IBD Best Mutual Funds Awards winner by topping the S&P 500 in 2020 and in the three, five and 10 years ended Dec. 31. What’s more, many of the stocks the fund invests in are among IBD’s 50 Best ESG Companies.
This past month alone, the fund outperformed 98% of its peer group.
Fifty-year-old Kelly, 57-year-old Burton and Petersen, age 59, talked about their investment approach with IBD from Minneapolis, Minn. Kelly and Burton were at their homes. Petersen was at his office.
Does ESG Investing Hurt A Stock?
IBD: How does ESG investing help rather than hurt the fund?
Justin Kelly: ESG matters because we want to invest in sustainable businesses. The ESG lens helps Winslow identify nonfinancial factors that may impact financial results in the future. By considering and discounting nonfinancial risks into our fundamental analysis, Winslow believes we can deliver better risk adjusted returns for our investors.
IBD: The fund also pays attention to what you fellas call “controversy inputs.” What is that?
Stephan Petersen: It is fancy wording for headline risk. We want to make sure that companies that are in the spotlight are aware that in this day and age, controversies are a big part of what may move share price.
IBD: What do you tell corporate executives about headline risk?
Kelly: Controversy can cost them customers. Customers today are very interested in understanding the values of companies they buy products and services from. Having controversy may be bad for business.
If a company is considered a bad actor, it may also be bad for getting the best possible future talent.
New ETF Sister Fund
IBD: Nuveen just launched an active exchange traded fund (ETF) version of this fund. Why should anyone stick with the mutual fund version of this strategy? Won’t the ETF have a lower fee?
Kelly: The funds will have similar fees. The advantage for new investors is that an ETF will increase their liquidity. And it will not have an embedded, taxable capital gains.
If you are already invested in the mutual fund, you’d want to stick with it because most investors in recent years have a large capital gain. Selling (to switch into the ETF) would trigger a tax liability. We would not advise anybody to sell the mutual fund and buy the new fund.
IBD: What about newcomers, who don’t already hold the mutual fund?
Kelly: If they are taxable investors, they may have a preference for the ETF, which is unlikely to have capital gains, substantial capital gains, much like an index ETF.
Buys By One Of The Best Mutual Funds
IBD: What if anything is the fund doing to take advantage of the economic reopening?
Kelly: We did some slight repositioning at the end of last year to take advantage of the reopening. That included buying stocks such as Hilton (HLT), Starbucks (SBUX) and Chipotle (CMG). They managed pretty well through the downturn. They should be even stronger coming out of the downturn.
Chipotle, for example, increased its digital offerings. Now that stores are reopening, they should maintain their digital business as well as regain their in-store business.
Reopening Helps Which Tech Stocks?
IBD: Do you hold any technology stocks that should benefit from the reopening?
Patrick Burton: People usually don’t think of them as technology companies, but Visa (V) and Mastercard (MA) have large payment networks (that rely on technology). Their cross-border fees evaporated with the lockdown in March 2020. So both are well-positioned with the pickup in global travel and spending.
IBD: Which others?
Kelly: Cloud-computing companies, especially Microsoft (MSFT) and Google (whose parent is Alphabet (GOOGL)), will benefit from the reopening. Enterprises are increasingly comfortable operating as digital-only businesses, with workers working from home. And that means outsourcing computer power to Microsoft and Google and Amazon (AMZN) Web Services (AWS).
How Nvidia Helps This Portfolio Remain One Of The Best Mutual Funds
IBD: Nvidia chips are fast because they perform serial calculations. What’s your thesis for this stock?
Burton: Their speed enables a lot of machine learning and artificial intelligence (AI). Their graphics processing units (GPUs) are better in terms of price and performance than traditional CPUs. We expect that to continue.
There was a large pickup in gaming, which rose during the shelter-in-place period. And we’re at the beginning of a product cycle in that, which we expect to continue another two or three years.
And if Nvidia is able to get the acquisition of Arm (a British chip-design firm) through regulators, it will be a huge strategic addition.
What’s To Like About Alphabet?
IBD: You like Alphabet. One strength is Google’s advertising. Another is that Android powers nearly 80% of smartphones globally. What else do you like?
Burton: The third piece is Google Compute. The first two pieces, Google’s advertising and Android are better known and really strong.
Google Compute is small vs. Azure and Microsoft and Amazon’s AWS. But it is the most rapidly growing of the three.
And Google Compute brings a strong machine learning capability to customers. That’s a business that could grow at very, very high rates for at least five years or longer.
ASML Can Help Large-Cap Growth Stay Among The Best Mutual Funds
IBD: I imagine that what you like about ASML (ASML) is that it is the only maker of computer-chip manufacturing machines that use extreme ultraviolet light (EUV). Basically, EUV’s tiny wavelengths are good for making chips with extremely small nodes, or transistor gates. The smaller they are, the more that can fit onto a chip.
Burton: Everything you said is spot on. They are the only provider of EUV technology. That’s an incredible moat for their business. They sell chipmaking machines to chip foundries like Taiwan Semiconductor (TSM).
In contrast, Nvidia hardly builds any of their own chips. They outsource. They’re a fabless manufacturer. TSM builds their chips.
Smaller nodes are important because machine learnings, AI, 5G telecom and some day truly autonomous driving, all the things that Nvidia chips do require more small nodes. EUV is rolling out 5 nanometer nodes and there are discussions about 3 nanometer nodes.
In legacy technologies, like 28 nanometer nodes, ASML probably has a 95% market share. That business picked up in the last year in response to the global economic recovery and chip shortage.
If You Like ESG Investing, Should You Like Adobe?
IBD: ESG investing is important to you. Tell me please what the ESG appeal is of a stock like, say, Adobe (ADBE).
Petersen: How you take care of your intellectual brainpower means a lot. They do a really good job in human capital management. They also have a partnership with educational institutions to develop joint programs.
Another ESG strength is in data security and cybersecurity. What we particularly like is that they engage external independent auditors to assess their security policies. That gives confidence that customer data is safe and secure.
They also do a good job training employees in data security policies.
Why One Of The Best Mutual Funds Holds Shopify
IBD: Shopify (SHOP) makes e-commerce platforms for small- and medium-sized businesses. What do you like about it, especially in ESG terms?
Kelly: They’re the alternative to using Amazon as an e-commerce platform for small- and medium-sized businesses. Shopify’s business took off during the pandemic because many enterprises could not sell through physical stores. They shifted online.
Shopify is doing a good job of developing their own employees and engaging with them. That’s a self-reinforcing attribute of a successful technology company. You’ve got to be a desirable place to work. And to be successful, you must get the most out of your employees.
Fifty years ago, most corporate assets were physical. Now almost all the assets in the S&P 500 are intangible. For those assets to perform at an optimal rate, companies need to take care of them. Companies that do that have better earnings growth.
Is Chipotle Healthy For One Of The Best Mutual Funds?
IBD: You feel Chipotle has solved their foodborne disease problems. What else do you like there now?
Kelly: They’ve expanded their revenue opportunities by engaging with customers through apps. They’ve retooled restaurants to have a second food line, just for takeout and drive-through customers. That increases the potential of each store. And that revenue comes with a higher margin.
They also have one great ESG attribute: they have always treated their employees very well. In today’s restaurant industry, it’s a real challenge to find labor. People are demanding higher wages. Because Chipotle already pays higher wages and is a desirable place to work, they’re not seeing their margins go down because of cost inflation like other restaurants.
They’ve paid attention to their employees for years. You can see how good ESG attributes make for good returns in the long run.
Follow Paul Katzeff on Twitter at @IBD_PKatzeff for tips about retirement planning and actively run portfolios that consistently outperform and rank among the best mutual funds.
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