He also employs a number of risk-control measures in the portfolio, limiting the size of any company position, for instance, to 2.5% of assets, or by limiting the sector allocations to no more than 5% above or below the benchmark. “We want to earn alpha through stock selection rather than sector bets,” he says. On the sell side, Zibelli and his team are constantly on the lookout for signs that a company is vulnerable to disappointing fundamentals, including a slowdown in earnings, that could spark a downturn.
The combination has produced above-average resilience in down markets as well as responsiveness in bull markets. “Zibelli, Livengood, and the rest of the team have done a pretty good job executing this strategy since adopting it for this fund in mid-2010,” notes Morningstar senior analyst David Kathman. “The portfolio has typically had higher average valuations and growth rates than the mid-cap growth Morningstar category and the Russell Midcap Growth Index, thus helping it keep up in bull markets, but the managers’ preference for steady, profitable growers has provided some downside protection when the market goes down.” According to the report, since mid-2010 the fund has beaten the index in quarters with negative returns, and exceeded it about half the time in quarters where the index gained more than 4%.
‘Neutral’ Market Outlook
Going into 2020, Zibelli says he has a “neutral” market outlook. On the one hand, the U.S. economy seems to be growing, albeit slowly. Wages are ticking up, and consumer sentiment is generally positive. Interest rates appear to be in check. On the other hand, corporate profits are flattening out and wild cards such as trade negotiations and election results remain in play.
Companies that are able to grow earnings in an uncertain economy with the help of innovative products or services can be found in a variety of industries, Zibelli says. In the industrial sector, for example, fund holding CoStar Group has grown into the largest provider of commercial real estate data in the U.S. and maintains the most comprehensive database of commercial real estate information in the industry. Its users, who pay a monthly fee for its subscription service, consist of brokers, investors and other professionals in the real estate industry.
“CoStar is like the Bloomberg of the commercial real estate industry,” he says. “It has great leadership, a sustainable competitive advantage, and a vast database that took 15 years to assemble.” Its earnings per share have risen fivefold in the last four years.
RingCentral, another fund holding, is a leading source of affordable software communications systems for businesses, helping them with functions such as cloud phones, online messaging and online faxes. “The software replaces old telecommunications equipment and gives businesses state-of-the-art digital capabilities in a couple of weeks,” Zibelli says. “Instead of requiring a giant install, RingCentral has an easy-to-use subscription model.”
One of the health-care holdings in the Invesco fund, Dexcom, sells devices for managing diabetes. Such devices have traditionally required users to prick their fingers several times a day for blood testing, but the Dexcom offering allows users to simply look at a device attached to the body that constantly monitors glucose levels and issues alerts when numbers go out of the safe range. Zibelli says it’s particularly helpful to parents of young children because they can monitor glucose levels from their phones.
Chipotle, which was added to the fund last year, was once a holding in the small-cap fund. In 2015 and 2016, the company’s stock plunged after hundreds of customers became ill and media reports about salmonella, E. coli and other food safety problems at the company’s restaurants surfaced. The company later implemented a number of comprehensive food safety measures, and Zibelli bought the stock for the mid-cap fund about a year ago after a new chief executive officer joined the company. “He’s been systematically upgrading the company and is off to a great start,” Zibelli says.
