A fund manager who's outshining 95% of his peers unpacks the secret weapons behind his top 2 tech stocks - and explains why he almost never invests in hot IPOs
- The $245 million William Blair Large Cap Growth Fund managed by Jim Golan has outperformed 95% of its counterparts on a three-year basis and beaten the S&P 500 since 2005.
- In an exclusive interview with Business Insider, he shed light on two tech stocks that embody his long-term-investing process, and explained why he stays away from hot IPO stocks.
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For fund manager Jim Golan, picking the right stocks begins with picking the right industries.
He starts out by searching for industries where profits are growing at least as quickly as the overall the economy, and preferably at a faster pace. Only after this is complete does he dig into specific companies, with an eye for those best-positioned to deliver returns that help him beat the market.
His approach is the reverse of what some other stock pickers do, which is start by filtering a large universe of stocks based on a set criteria of fundamentals, then research the industry. But his process has placed the $245 million William Blair Large Cap Growth Fund in the 95th percentile of its peers on a three-year basis, according to Bloomberg data. The fund has outperformed both the S&P 500 and its Russell 1000 growth benchmark since Golan took the reins in 2005.
By starting out with industries first, Golan is able to identify market leaders that are structurally advantaged, meaning they have growth drivers that outlast economic shakeouts.
This longer-term approach to stock picking is why he almost never invests in IPO debuts.
"The amount of time and effort you'd have to put in to understand these businesses just isn't worth it," Golan told Business Insider.
Many of the splashy IPOs from younger tech companies simply do not have the track records that are needed to take a long-term view. And it's been quite a year for high-profile IPO flops, ranging from Uber to Lyft and Peloton.
He also pointed out that of all the companies that have come public over the years, only a handful grow to become juggernauts like Amazon, one of his top-two holdings.
History backs up his assertion that the failure rate is high. According to Innosight data cited by CLSA, the length of time large-cap stocks have spent on the S&P 500 declined from 33 years on average in 1985 to 20 years as of 1990 - and it's projected to shrink to 14 years by 2026.
"That's why we haven't done an IPO in years," Golan said. "We need to see a proven business model that actually has a path to generate cash flow and profits, rather than something that might be based on hopes and dreams."
He identified such a pathway in Microsoft and first bought its shares six years ago.
The company was not the obvious growth winner that it is today; its stock was trading at nearly half of its dot-com-boom peak and essentially flatlined in the years that followed.
But Microsoft was by no means a newcomer to the tech industry - and Golan saw this as an advantage.
The company already had a legacy of selling bulk Windows and Office 365 products to large and mid-size enterprise clients. And so as cloud computing boomed, Microsoft's Azure offering was perfectly positioned to profit.
On top of these advantages, Golan was drawn to the collective vision of CEO Satya Nadella and CFO Amy Hood to position Microsoft for a cloud-based future.
Amazon has been another major receiver of the cloud-computing bounty - and it's the second-largest holding in Golan's portfolio behind Microsoft.
For all the disruption Amazon has wrought in retail, cloud computing is the heavyweight as it has contributed the most to operating income over the past four years.
The company has yet another secret weapon up its sleeve: advertising. As more eyeballs depart linear television stations for the internet, Golan thinks the ad dollars will flow in the direction of companies like Amazon.