Adams Funds
- Founded in 1929, Adams Funds was one of the very few mutual funds that outlasted the Great Depression.
- By combining a 90-year-old gold mine of institutional knowledge with rigorous ongoing research, the firm continues to outperform the market.
- Business Insider recently interviewed CEO and portfolio manager Mark Stoeckle on his investing strategy and his favorite stock picks.
- Click here for more BI Prime stories.
When the board of Adams Funds asks CEO Mark Stoeckle about what's next for the firm, he responds by committing to keep doing what is working for shareholders.
After all, if an investing approach has outlived various market crashes including the Great Depression, there should be a high bar for changing it now.
But Stoeckle is first to acknowledge that a lot has changed about the way the firm invests despite its 90-year track record. Some of this change is borne out of necessity, to evolve and adapt with the market. For example, when the equity fund launched in 1929, the S&P 500 did not exist, the Dow comprised of actual industrial companies, and there was no algorithmic trading.
By combining the firm's rich institutional knowledge with his team's ongoing research, Stoeckle continues to outperform the market. Since he jumped ship from BNP Paribas in early 2013, the firm's equity fund has gained at a 15.1% annualized rate versus 14.2% for the S&P 500 according to Bloomberg data.
"Starting the fund around the Great Depression really taught the company about providing value to your shareholders," Stoeckle told Business Insider during a recent interview.
What's changed, and what hasn't
This value has been unearthed through the use of just two investment vehicles over roughly nine decades: the closed-end Adams Diversified Equity Fund and the Adams Natural Resources Fund. Stoeckle still does not see the need to launch new funds.
Another unchanging way he sees the firm creating shareholder value is by providing good returns for a fair fee. The Adams equity fund has an expense ratio of 0.58%. That's lower than the 2018 average of 0.71% for other large growth managers, but higher than the industrywide average of 0.48%, according to Morningstar data.
Besides fees and the fund structure, Stoeckle is forging ahead with own brand of investing.
He takes a sector-neutral approach to investing. That practically means that if healthcare stocks make up 10% of the S&P 500, his portfolio will hold the same weight in the sector. Rinse and repeat for all other 11 sectors.
"We do that because I would be terrible at making sector bets - flat out terrible," Stoeckle said. "I'm not a macro guy. Where I think we have an edge is at stock selection."
He has a four-part screening process to decide which stocks make it into the portfolio.
It starts with a quality screen for companies with strong balance sheets and a high return on invested capital.
Next, he uses a quantitative model created by Empirical Research Partners, a broker-dealer, to rank stocks by factors including momentum.
The third step is to examine whether every company is fairly valued relative to its sector.
The final step involves using charts and technical analysis to determine whether the timing is right to make an entry.
Stocks that survive these steps are then ranked again, and the top-rated ones make it into the portfolio. The entire process is supported by a team of analysts - one for each S&P 500 sector.
Once the picks are in the portfolio, the next crucial step is risk control. Stoeckle said mastering this piece of the puzzle is what has helped him outperform other funds even though they own many of the same growth stocks.
It involves periodically taking profits on big winners so that they don't cause a portfolio wipeout if they crash.
For stocks on the way down, he follows the following rule most of the time: sell half of the active position if the stock falls below its 52-week low relative to its sector. And after the sale, the sector analyst must make a case for continuing to hold the stock all over again.
Top stock picks
Stoeckle discussed three companies he is still holding for future growth:
1. Microsoft
"I think there's not a chance Amazon gets another government contract with this administration. That obviously bodes very well for Microsoft.
"Their Azure product competes incredibly well with Amazon Web Services and Google's."
2. IBM
"The adoption of cloud has been pretty steep.
"Certainly AWS and Microsoft are the top two. Google is the third. IBM is sort of a very distant fourth."
3. Visa
"It has been a very predictable business. Their European business has flourished and they continue to look for high-double-digit EPS growth, which is very attractive these days."