A rare fund in the green this year succeeds by betting on stocks that work even in a recession

Published Wed, Dec 7 20223:08 PM ESTUpdated Wed, Dec 7 20225:39 PM EST

As investors brace for more volatility in 2023, one fund beat the market this year by betting on stocks that work even in a recession. The Invesco Comstock Select (CGRYX) fund outperformed in 2022 because of a patient, contrarian approach to stock picking, which is largely derived from exploiting a longer time horizon compared to most funds, according to the portfolio managers. "We're looking to value a company on a normalized basis," said Kevin Holt, chief investment officer for Invesco U.S. Value Equities, and one of the co-leads on CGRYX. "So, when it gets an adequate discount to what we think is a normalized valuation, even if the economy is going to go against us short term, we're going to start accumulating that stock." In 2022, this approach helped the large-cap value fund rise 3.4%, easily outpacing about an 18% decline in the S & P 500, and declines of about 5% and 6% in both its category of funds and its index, according to Morningstar. That places Comstock Select in the top 5% of funds in its category. Further back, CGRYX was in the top 6% of roughly 1,000 comparable mutual funds across a three-year time horizon, and in the top 17% of such funds over the past five years. The fund's current portfolio managers started at the fund in June 2019. The select portfolio has a 0.680% expense ratio, and a minimum initial investment of $1,000. Contrarian flair For the portfolio managers, one of the stock picks that best exemplifies their investing style is Las Vegas Sands . The fund started adding to the position in the casino operator during the pandemic, when travel restrictions and lockdowns in Macao weighed on the gaming stock. Shares of Las Vegas Sands dropped roughly 37% in 2021, and about 12% in 2020. This year, however, the casino stock is up about 21%. "Las Vegas Sands is a name that we liked, because if you think about the overall quality of the business, it's a business that historically has generated very high returns on invested capital. So it's a high quality business," said Devin Armstrong, another co-lead on CGRYX. "It's a good market to be in, because traveling is an attractive industry." What's more, the managers expect further upside from here, anticipating that travel restrictions will further ease in China, even as Wall Street worries about the timing of a full reopening. On Wednesday, China announced an easing of some Covid controls . "We don't really try to predict when China's going to open," Holt said. "We think it's going to open at some point, and when it does, the pieces will play out." Stock picker's market Meanwhile, the portfolio managers say they've made some strong stock picks in communication services and information technology, areas of the market that took a beating in 2022. Holt and Armstrong said they sidestepped overvalued names and looked to salvage some attractive opportunities amid the two sectors' wreckage. "You could make money in technology last year or this year," Holt said. "It was just really, really difficult." One pick the investors have in the fund's top 10 holdings is DXC Technology . Armstrong considers the stock an "interesting turnaround story" as it is a leading player in the growing IT services industry. He expects depressed margins will recover as DXC shifts to higher value services, and notes the company brought in a new management team in recent years that has "significantly improved" the balance sheet. The stock is down about 19% this year. "When you put it all together, it's a stock that's trading at eight times earnings where the group is trading at more than double that," said Armstrong. "And we think there's an opportunity to significantly, not only improve the earnings profile, but the multiple improves as the growth profile looks more similar to the industry overall." Positioning for the future Other stock picks boosted the portfolio this year, such as the fund's overweight allocation to the energy sector. Comstock Select has about a 15% allocation to the sector, far more than the nearly 9% weighting that peers in its category have, according to Morningstar. Energy is the only one of the S & P 500's 11 sectors that's risen in 2022, climbing roughly 53%. Even so, Holt and Armstrong say they've now reduced some of their positions in energy, and eliminated others, while remaining slightly overweight the sector. While they expect energy will stay resilient in a recession, they say the valuations are "not nearly" as attractive as they were. Heading into 2023, the investors are now keeping an eye on chemicals, mining and retail stocks, as they're "starting to get interesting" from a valuation perspective, though "they're not quite there yet," according to Holt. Through it all, the portfolio managers advise keeping a long-term time investment horizon and patience, especially in a volatile macroeconomic backdrop. "We focus a lot on balance sheet and cash flows throughout the cycle," Holt said. "So we're very comfortable with the financial condition of the companies we buy, even if we buy in the middle of a recession."