Why a Patient Growth Fund Is Sticking With Microsoft and Hess Stock

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It’s hard to step into a legend’s shoes. But managers Gentry Lee and Alan Christensen had been working with Fayez Sarofim as stewards of the BNY Mellon Worldwide Growth fund for years. When their mentor died in May at age 93, they were prepared to carry on his legacy.

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The eponymous Houston-based firm Fayez Sarofim, founded in 1958, has run the $899 million fund (ticker: PGROX) as its subadvisor since its 1993 inception. Lee has been a manager since 2010 and Christensen since 2020, and they’re assisted by three other managers—Catherine Crain, Charles Sheedy, and Christopher Sarofim. All five focus on founder Sarofim’s original strategy of buying stocks of high-quality companies with strong competitive advantages, and holding them for a very long time. The fund has a turnover ratio of 7%, indicating a holding period of about 14 years.

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Fayez [taught us] that once you own a really great business, to stick with it and let the power of compounding work for you over the long run,” Lee, 50, says. “That’s something that really was instilled into all of the members of the firm here.”

The slow-and-steady approach works. The fund has beaten 94% of its peers in Morningstar’s Global Large-Stock Growth fund category in the past five years with an 11.9% annualized return, and 92% in the past 15 years with an 8.1% one. Its high-quality portfolio has also fallen a lot less in this year’s bear market, down 14.4% versus the category’s 22.5% drop. Its 1.14% expense ratio is below average for its fund category, and its 5.75% load is waived at brokers such as Charles Schwab and Fidelity.

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The firm’s low-turnover approach applies to people as well as stocks. While at Harvard Business School, Lee interned at Fayez during his summer vacations, before receiving his MBA in 1998 and joining the firm full-time, first as a research analyst. He has been the firm’s CEO since 2015, and is now its sole chief investment officer, after previously sharing the role with Sarofim.

The collegial nurturing environment, away from the hustle and bustle of Wall Street, leads to high employee retention and a cohesive focus on deep fundamental stock research.

The firm, which manages about $28 billion overall, runs only two public mutual funds, this one and BNY Mellon Appreciation (DGAGX). Both employ the same high-quality blue-chip strategy, the difference being that Worldwide Growth generally has at least 25% of its assets overseas.

“There’s really a small number of unique and differentiated businesses,” Lee says of Sarofim’s strategy. “He wanted us to focus on what businesses could stand the test of time and not be tempted to trade down in quality because of some short-term consideration.”

The fund typically only holds 40 to 60 stocks, with 49 as of June 30. Though the team rarely adds new positions, this year there have already been two—Swedish lockmaker Assa Abloy (ASSAB.Sweden) and French lens and sunglass company EssilorLuxottica ( EL.France). “There’s been a lot of volatility in the European stock indexes so far this year,” Lee says. “We had an opportunity to pick up two really good franchises.”

Assa Abloy dominates the door lock business, having three times the market share of its next largest competitor. As a result, it has “pricing power” over its products, Lee says. That is essential in today’s inflationary environment. Companies that can’t pass on their rising input costs to consumers will see their profit margins squeezed. But such pricing power requires both market dominance and financial strength—so that raising capital isn’t needed, especially as debt is getting more expensive with rising interest rates.

EssilorLuxottica is the product of a 2018 merger of Italian sunglass and frames maker Luxottica with the French lensmaker Essilor. “Each had a good position in the market,” Lee says. The combined company dominates the global eyewear sector.

EssilorLuxottica and Assa Abloy both have strong balance sheets, he adds. That in general can enable management to acquire weaker, more-leveraged competitors during periods of stress—like now.

While the team is focused on the long term, if they see evidence that a company’s management is making poor decisions, they will sell. Microsoft (MSFT) is an interesting case.

“Microsoft is a name that we had owned since the mid-’90s,” says Christensen, 48, who covered the stock as an analyst before becoming a co-manager. “I got to know folks at all levels in the organization, as well as interacting with Bill Gates and Steve Ballmer.” Despite liking the company’s core software business, Christensen felt it was venturing into uncharted waters by first trying to acquire Yahoo in 2008 and then expanding into videogames. The fund sold the stock in 2010, but bought it back in 2016.

“Just because a company is not in the portfolio, if it’s identified as what we believe is a dominant company in a structurally attractive industry, our analysts are charged with continuing to cover it,” he says. That helped the team notice a change that started when Amy Hood became chief financial officer in 2013. And when Satya Nadella became CEO in 2014, they “really saw a reinvention of Microsoft.”

Christensen now sees the cloud-computing platform Azure as the “centerpiece of Microsoft” with strong growth potential. The company has grown to be the fund’s largest holding, at 8.5%.

While tech stocks like Microsoft, Apple (AAPL), and Alphabet (GOOG) make up 25% of the portfolio, the team also invests in less familiar growth companies. For instance, energy stocks make up 7.5% of the fund. One 2021 purchase was Hess (HES).

Hess has “the opportunity for very significant growth over the next decade due to their ownership of some very productive [oil] fields offshore of Guyana, alongside Exxon Mobil
[XOM],” Lee says. “The project is really a crown jewel for both companies, but it represents a bigger percentage of the value of Hess.”

Given the Fayez team’s patience, they can afford to wait until Hess has squeezed every last drop of profit from those oil wells.

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Credit: www.marketwatch.com /

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