Being benchmark-agnostic and having cash on hand at times has worked both for and against the fund over the years, noted Morningstar analyst Tony Thomas in a report. “After a hefty cash stake helped it weather the 2008 downturn better than most mid-growth funds, the fund trailed more than 95% of its peers from 2009 through 2011, despite becoming more fully invested. Stock selection in health care (the fund’s heaviest sector weight in the period) and financials hurt the fund. But the fund beat 97% of its peers when health-care stocks rallied from 2012 through 2015.”
DeNichilo says the cash holdings serve a number of important functions—they lower portfolio volatility and give the fund dry powder to invest when the market falters and stocks become more reasonably priced. “When we don’t see anything we like at the right price, we won’t buy, and that can let cash build up,” he says.
On a sector level, the fund’s biggest deviation from the benchmark is its substantial overweight position in health-care stocks. Many of the holdings are biotechnology companies, while other holdings are businesses that serve and support these. The latter group includes Veeva Systems, a California-based leader in cloud-based software for the global life sciences industry. The company has more than 625 customers, ranging from the world’s largest pharmaceutical companies to emerging biotechs. The Federated Kaufmann Fund established a position in this stock at its initial public offering in 2014.
Another fund holding, Tyler Technologies, is the country’s largest software company devoted exclusively to cities, counties, school districts and other areas of the public sector. One of its newer offerings is arbitration software designed to allow users to resolve disputes without going to court. “Tyler is reducing costs and increasing efficiency for local governments,” he says. “It has 80% recurring revenue, strong margins, no debt, a treasure trove of cash, and an active stock buyback program.”
Floor & Decor, which the fund added as an IPO last year, is a high-growth multichannel specialty retailer of hard surface flooring and related accessories. Its warehouse stores, which average about 73,000 square feet, offer in-stock assortment of tile, wood laminate and natural stone flooring at highly competitive prices. Many members of its management team came from Home Depot, and DeNichilo believes the retailer has the potential to grow from 75 stores today to 200 to 300 stores over the next few years.
