Focusing on stable earnings growth helps this Olympic gold medalist beat the bear market

Published Wed, Feb 1 202312:02 PM ESTUpdated Wed, Feb 1 20233:19 PM EST

A mutual fund led by a gold-medal winning Olympic swimmer is rare enough, but Joe Hudepohl's Eaton Vance Atlanta Capital Focused Growth is also outperforming the stock market over the past five years. Maybe it's the former athlete's discipline and slavish devotion to patient training that's helping Focused Growth earn handsome long-run returns. " We're looking for high quality, growing, sustainable businesses, and our belief is checking all three of those boxes gives you the highest return with the lowest risk," said Hudepohl, the youngest member of the U.S. swim team to compete at the 1992 Summer Olympics in Barcelona, where he won a gold and a bronze. Now 49, Hudepohl went on to win another gold at the Atlanta games in 1996. The consistent growers that Hudepohl and his team search out can be hard to find in an environment defined by slowing growth, high inflation, surging interest hikes and a Federal Reserve steering the economy perilously close to a recession to tame high prices. But despite falling 20.4% last year, the Focused Growth fund still enjoys a five-year annual trailing return of 13.97%, according to Morningstar. Since its inception in 2003, Focused Growth's success has hinged on a multi-year strategy, even with a slightly above average expense ratio. Annual turnover is low — just 7% — and managers invest with a three-to-five-year time horizon, Hudepohl said. "We're trying to really find businesses and compound with them over time," he said. "If we find great businesses, then we stick with them. We don't really change our stripes very much." One of those long-time holdings is health technology company Danaher , which Focused Growth (EAALX) first bought in 2011, according to Morningstar. As of Morningstar data from Nov. 30, Danaher accounts for more than 6% of the portfolio, the second-largest single holding. Solid management and a strong track record of acquiring other businesses reinforce the Danaher investment case, Hudepohl said. "If you are the Pfizer's of the world, or any pharma biotech company, if you're doing research and developing drugs and pushing them out there, you're using their products," he said. "And so, in our mind, that's a better way to play," growth in healthcare. Conservative ways to play tech To be sure, Hudepohl, who joined Atlanta Capital Management as a portfolio manager in 2015 after stints at Goldman Sachs and Logan Circle Partners, isn't giving up on more conventional technology stocks In fact, while many apprehensive investors abandoned the sector or reduced their positions, he maintained sizeable bets on Alphabet and Microsoft . Both stocks, among EAALX's top ten holdings as of November, took a beating in 2022, Alphabet tumbling 39% and Microsoft off 29%. But a focus on the long-term trajectory of their businesses underpin Hudepohl's loyalty. Alphabet entered the portfolio in 2015, and Microsoft in 2016. Hudepohl searches for conservative ways to play tech. Microsoft, for example, with strong top-line growth even as its current size, represents a lower-risk way to bet on cloud computing, he said. As for Alphabet, the owner of Google and YouTube, the attraction of high free cash flows and a leading position in advertising eclipse the drawdown in the stock in 2022. "The moat is so big, when you think about the more people search, the more data they have, the better results they can provide," said Hudepohl, a Stanford graduate. "That virtuous circle makes it hard for people to knock that." Focused Growth's other technology bets include smaller positions in Meta Platforms , Adobe and PayPal . Tech and financials each accounted for roughly 23% of the portfolio's holdings at the end of November, the two largest sector bets, according to Morningstar. Morningstar rates the fund with five stars despite its 1.03% expense ratio, and says Focused Growth lands in the second percentile of more than 1,000 large growth funds for its five-year performance. Betting on financials Financials have provided a long-term opportunity for the fund. Visa has been the biggest single position in the fund — last reported at 7.35% — for the past five years. Credit card companies took a hit during the pandemic as cross-border travel ground to a halt. Visa, for example, shed about double digits from the first confirmed Covid-19 case in the U.S. through the end of March 2020. But betting on an eventual rebound paid off. In last year's market chaos, the stock fared better than the broader market, falling just 4.1%, and it's already gained more than 10% since the start of this year. V YTD mountain Visa shares have gained more than 10% this year Going forward, Hudepohl expects more growth for financials as consumers continue to spend less cash and transition ever more transactions to cards and other cashless payments. Mastercard is another top 10 holding, accounting for roughly 5% of the portfolio, which has about $700 million in assets. Markets face uncertainty in the months ahead as a possible recession looms over the economy and investors question when the Federal Reserve will stop raising borrowing costs, and how long it will leave rates high. But Hudepohl is standing by his well-honed strategy. "We're not trying to trade quarters, we're not trying to trade even years," he said. "The market can be very emotional, very short sighted, and so we think our arbitrage is to really bet on the long term."