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John Hancock Fund Bets Just On Its Best Ideas

The $2.7 billion John Hancock U.S. Global Leaders Growth Fund (USGLX) is one of the best mutual funds. One key step the managers take to achieve that is to limit their portfolio to a select group of stocks they like the most.




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U.S. Global Leaders Growth Fund held just 29 stocks as of July 31. Why not diversify more? “Not to be too overly simplistic, but we get to invest in our best ideas,” said Gordon Marchand, a manager of the fund since its inception 25 years ago as of last Wednesday. “They are the best valued companies, with good business trends behind them, out of the 120 stocks that we track.”

For some institutional clients, the managers winnow this strategy to only 15 stocks at a time. Industry rules bar the mutual fund version of this strategy from paring down below 21 names, Marchand says.

Marchand’s co-managers are Robert Rohn and Kishore Rao. They are with subadvisor Sustainable Growth Advisers.

Best Mutual Funds: What This Portfolio Seeks

A factor in the fund’s success in winning its spot among the best mutual funds has been its pursuit of stock in companies that have pricing power, recurring revenue and global sales.

And it wants companies that can generate strong earnings growth whether the macro economy is good or bad. Companies with all of those traits have what Marchand, Rohn and Rao prize most.

“What we look for are sustainable growth businesses,” Marchand said. “That’s what differentiates this fund — our relentless focus on predictability.”

That has led to a portfolio that includes software mammoth Microsoft (MSFT), digital payments pooh-bah PayPal (PYPL) and medicine maker Regeneron Pharmaceuticals (REGN).

Best Mutual Funds: Holding Microsoft Helps

As the portfolio’s No. 4 holding as of June 30, Microsoft is a big driver in U.S. Global Leaders Growth Fund’s push to remain one of the best mutual funds.

And currently, Microsoft is the poster child of predictability. Its earnings per share growth is accelerating. It grew 32%, 34%, 39% and 49% the past four quarters.

U.S. Global Leaders Growth Fund likes Microsoft CEO Satya Nardella’s leadership. “His strategy is consistent with our investment approach,” Marchand said. “He focused on converting their base of Office suite users to subscription customers. That creates recurring revenue, which we like.”

Microsoft Azure has benefited from the surge to cloud-based software by corporate customers. “Now Azure is a strong No. 2 in that business behind Amazon Web Services,” Marchand said.

And Marchand’s team likes newer acquisitions such as professional network LinkedIn and webpage development platform GitHub more than takeovers in the Steve Ballmer era like videophone service Skype. “Their acquisitions now fit with their long-term strategy,” Marchand said.

PayPal Performance Is Predictable

Digital and mobile payments processor PayPal is another key cog in this portfolio’s fight to stay in the winners’ circle of best mutual funds.

PayPal’s dominance in its field has given it the predictability that Marchand, Rohn and Rao like. “PayPal is a trusted brand name,” Marchand said. “It got that way by being an innovator in the attractive area of digital payments.”

By building loyalty among consumers and merchants, “they have built a moat around their business,” Marchand said. “And they’re seeing tremendous growth in online payments.”

PayPal is winning new business outside the U.S., Marchand says. And fees are higher for transactions by Americans traveling abroad.

Earnings per share growth slowed from 85% to 7% the past two quarters. Marchand suspects a big cause is the wind-down of eBay’s use of PayPal as a primary payments processor. EBay used to own PayPal. “They are both pursuing their own self-interests,” Marchand said.

Regeneron Gets Novel Drugs To Market

Another key is Regeneron Pharmaceuticals as the portfolio seeks to repeat as one of the best mutual funds.

Regeneron’s earnings per share grew 50% and 260% the past two quarters. But the latest quarterly profit likely got a boost from sales of Covid-19 therapies. That boost could prove short-lived.

Still, in September the company announced a $2.94 billion deal to provide another 1.5 million of its Covid-19 antibody cocktail, REGEN-COV. “The company has an uncanny and proven ability to get novel drugs to market quickly,” Marchand said. “It’s an R&D company at the core that partners with companies to share development risks. Their drugs address large markets with unmet medical needs. They also have some newer drugs that have recently come to market.”

Marchand cites Dupixent, for treatment of atopic dermatitis, a condition that makes your skin red and itchy. He also cites Libtayo, for treatment of certain skin cancers.

By The Numbers: One Of The Best Mutual Funds

U.S. Global Leaders Growth Fund 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.

This year going into Wednesday, the S&P 500 topped the fund with a gain of 17.12% vs. 14.63%. The fund’s large-cap growth rivals tracked by Morningstar Direct are up 13.37% on average.

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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