- TheAB Concentrated Growth Fund, overseen by Jim Tierney, has outperformed its Lipper category on an annualized basis during his five years as its chief investment officer.
- His concentrated strategy requires that only about 15-20 stocks are in the portfolio at any given time.
- In an interview with Business Insider, he detailed the numerical and subjective criteria that go into his stock-picking process, and the reasons he’s betting on five companies to withstand a slowdown in earnings growth.
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Jim Tierney can use a painful market crash every now and then.
While other investors are panic-selling, these episodes present his best opportunity to prove that the stocks he’s invested in can thrive no matter what. As the chief investment officer of the $522 millionAB Concentrated Growth Fund, he’s tasked with finding companies that can deliver earnings growth regardless of the market-wide climate.
For proof of his prowess, Tierney cites his upside capture ratio, which gauges the extent to which mutual-fund managers outperform their benchmarks during rising markets. It’s “a little bit over 100” over his 11-year tenure as the strategy’s portfolio manager, he said, placing it above the numerical threshold that shows he can beat the market even when it’s lifting all the boats.
Meanwhile, his downside capture ratio is 95, indicating the fund has lost less than its benchmarks during sell-offs.
The fund’s more rudimentary performance numbers tell the same story of outperformance. It has beaten its Lipper category on an annualized basis during Tierney’s five years as chief investment officer. It’s also in the 92nd percentile versus peers over the last year, according to Bloomberg data. He had managed the same strategy at W.P. Stuart and assumed the CIO role after AB acquired the firm in 2013.
Tierney holds between 15 and 20 US-based companies in the portfolio at a time. And because the concentrated strategy requires they be so few, he has put in place some longstanding hurdles that each one must clear.
On the numerical side, Tierney screens for companies that have strong double-digit earnings-per-share growth rates over a forward-looking, five-year period.
He’s also looking for solid revenue growth that’s generated organically by sales volumes. One red flag in this regard is the excessive use of leverage, because if macroeconomic conditions turn south and credit markets dry up, such companies would be vulnerable to massive losses or even liquidation.
Tierney also hunts for companies that do not depend on the business cycle to grow their earnings. That’s why he almost never invests in companies exposed to swings incommodity pricesno matter how attractive their earnings are at the moment.
Not all of his criteria are numeric. He views buying a stock as entering into business with a management team — not just placing a bet that its price will go up.
This means that when he’s not listening to analyst calls during earning season, he’s making time to visit company leaders at their headquarters. These visits are key, he said, because executives tend to be more relaxed and candid on their home turf versus when they’re being hurried around New York City on roadshows. Company visits can also reveal helpful clues about corporate culture such as the caliber of cars in the parking lot or the number of days since an on-site accident at a factory.
Based on these criteria, Tierney aims to be a long-term holder in a handful of companies, always checking to make sure they validate the theses that led him to buy. He shared with Business Insider the basis for his investments in five of his top, longest-held companies. All the details below are directly quoted from Tierney:
“We’re trying to find companies that are relatively immune from the economic cycle. What that allows us to do is protect the downside much more significantly than other strategies.
“If we have an economic slowdown, maybe Mastercard’s transactions slow to 12-13%. That’s still going to be a very attractive business. Whereas if you have an economic slowdown and you have a company that has a lot more cyclicality in their business, they may go negative growth.”
“Every device has more intelligence and connectivity built in than it did five or 10 or 20 years ago.
“Think about your microwave, which, five years ago, had no intelligence in it. Now you have microwaves that are being built with voice recognition.
“As a result, you’re putting connectors in devices that are in harsher, less stable environments, so you need better and faster connectors. As you’re constantly moving up that curve, that advantages Amphenol’s business.”
“If you look at two of their recent innovations, one is their FreeStyle Libre patch for diabetics. It’s a patch as opposed to pricking your finger 10 or 15 times a day to get a blood-glucose reading.
“That’s a product that has about 1.3 million users today. But there are tens of millions — if not hundreds of millions — of potential customers around the world.”
“We see the cloud business — Azure — as one of the two leading cloud businesses in the world, with the leader being AWS.
“This is a business that’s basically breakeven today, but five or six years from now, is going to be producing a huge amount of earnings. When you go back and look at whenAmazongot to scale, it was right at this point, and then earnings just hockey-sticked upwards.
“I think the street is underappreciating the strong earnings growth that Microsoft is going to be posting over the next few years.”
“It’s all about the transition from mechanical locks to electronic locks and the impact that is going to have on the business.
“You’re having a dramatic pickup in the lifetime revenues of an electronic lock versus a mechanical lock. And when you look at the addressable market, it’s everyone.”
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