This concentrated mutual fund is crushing the market this year. Here's how it picks stocks

Published Sat, Oct 2 20219:16 AM EDT

Jesse Pound @/in/jesse-pound @jesserpound

Scott Weber is not a man who likes to be put into a box. The Vaughan Nelson portfolio manager has carved out a career and beaten the market by taking a unique approach in the increasingly specialized world of investment management. He sees his goal as building the financial well-being of his clients, not being the best performer in any particular style group. "People invest to make a return. They don't invest because they want to beat the S & P. They don't invest because they want to win a Lipper Award," he said. That goal is being met with ease this year. The y-share class of the Natixis Vaughan Nelson Select Fund , which Weber co-manages with Vaughan Nelson CEO Chris Wallis, was up more than 23% year to date through September, easily topping the three major indexes. The S & P 500 returned just under 15% in the same period. The fund, which has a four-star rating from Morningstar, also has a slightly better average return than the S & P 500 over the past five years and well above Morningstar's large cap blend category. It is also offered as an ETF under the ticker VNSE. The fund has heavy weights in some of the major tech stocks, but it has a high active share thanks to its small number of holdings and outsized positions in other names, like railroad company Union Pacific and medical device maker Masimo . "We regard the benchmark as a competitor. It's not a menu or an investment guide," Weber said. "There's no rule that says you can't own something because it's not in the benchmark or anything like that. It's simply another way for clients to meet their retirement goals that happens to be lower fee." The Vaughan Nelson Select fund is unusually concentrated for a mutual fund, with just 30 holdings at the end of August. Weber, whose previous jobs include being a Colorado river guide and an investment banker, said he doesn't stress about having exposure in every single sector of the market. Instead, the fund leans on an internal research team at the firm to create diversification in the portfolio by examining its sensitivity to different factors, such as interest rates. "We don't want to have unintended factor exposures or missing factor exposures. By extension, we can also look at the investable space and say what do we really need to add to the portfolio," Weber said. Stock selection The Vaughan Nelson Select is biased toward value stocks, and the companies that Weber likes are companies that are "generating capital, not consuming capital." He credits collaboration with other people in the firm and the fund's four-person team of 'equals' that challenge each others' ideas as a reason for stock-picking success. "Frankly, if there's not dissent at each and every level, than we're not doing our job," he said. One of the best performers in Weber's portfolio this year is a company that has put its excess capital to work. Monolithic Power , a semiconductor company that has expanded its production capacity and types of products during the recent chip shortage, has risen 30% year to date. "They generate so much capital that they're able to pay a little bit of a dividend, but most importantly they are reinvesting to accelerate their own growth, which is return-enhancing in and of itself. And that is the essence of capital formation," Weber said. Monolithic is not the only big semiconductor bet in Weber's portfolio, as Nvidia takes up more than 5% of the fund. When to sell Another big winner for the fund this year has been vaccine maker Moderna , though Weber has trimmed that position over the summer as the stock shot higher. When discussing his philosophy on when to sell, Weber said it is sometimes smart to "harvest some of the good to fertilize the great." It is important for investors to remember why they like a stock and check to see if that idea is still intact rather than fret over every move of the price chart, he said. "I'm less concerned if we're wrong because a security price is down because it happens to be out of favor. I'm more concerned if the security price is down because something has changed or it's not operating along the lines we thought it would," Weber said. Keeping yourself honest about why you own a stock, and letting others challenge you on it, is a key part of investing, Weber said. "If you don't know why you own it, and you haven't put in writing and held yourself publicly accountable for why you own it and what you think will happen — that way you can't change your mind as the market moves … you will absolutely never know when to sell it," he said.

Tourists are lined up for taking photos by the Charging Bull Statue in the financial district of New York City, United States on August 16, 2021.

Tayfun Coskun | Anadolu Agency | Getty Images

Scott Weber is not a man who likes to be put into a box.

The Vaughan Nelson portfolio manager has carved out a career and beaten the market by taking a unique approach in the increasingly specialized world of investment management. He sees his goal as building the financial well-being of his clients, not being the best performer in any particular style group.