MainStay Large Cap Growth Sees Market Tilting Toward Its Favorite Types Of Growth Stocks

In a global market starved for growth, lead manager Justin Kelly thinks his $14.7 billion MainStay Large Cap Growth Fund (MLAAX) is about to feast like a shark amid a school of tasty fish.

After losing more than twice as much ground in the first quarter than its average large-cap growth rival tracked by Morningstar Inc., the fund doubled its peer group's Q2 gain. And so far this quarter it is ahead 5.49% vs 5.21% for its peer mutual funds, going into Thursday.

So what's behind the fund's sudden burst of speed? The market has tilted back toward the types of stocks favored by the fund. That includes stocks like UnitedHealth Group (UNH), which is up about 20% this year.

And lead manager Justin Kelly thinks the party for growth stocks is still ramping up.

"Growth stocks underperformed this year vs. what I call safety stocks," Kelly said. "Safety stocks do best when the 10-year bond is declining in yield. Those are utilities, staples, telecom and REITs. They all did well in the first half of the year. But since June 30, this fund has been on a tear."

The fund focuses on stocks that grow faster than the broad market. And in the current global market, where growth overall is slow, stocks that can manage to generate above-average growth will be in greater demand, Kelly says. "If that happens, growth stocks will do better than value, and this fund will rip!"

One key to how the fund maneuvers through various markets phases: It adjusts its allocations among three types of growth stocks the managers seek.

One bucket contains stocks that the fund sees as long-term sustainable earnings growers. The second bucket contains quality cyclical growers. And the third holds stocks in newer industries with rapid growth.

Sustainable growers have some competitive advantage that lets them grow year after year. UnitedHealth Group is an example. Revenue for the provider of health care coverage and benefits services has grown at a double-digit pace for six quarters in a row.

Broadcom (AVGO) is one of the fund's cyclicals."They have radio frequency filters that are highly desirable and the best in the market to allow mobile phones to jump from one frequency to another," Kelly said. "That gives them pricing power that few other vendors in their semiconductor industry have."

Broadcom's filters, Kelly adds, enable phones to work on networks in different countries and as a user moves from one cell tower to another.

Raging ROI

Facebook (FB) is in their bucket of stocks in newer industries with rapid growth. A top-10 holding as of June 30, its rapid growth comes from market-share gains in advertising. "Its return on investment (for advertisers) is better than they get on other platforms like television and print," Kelly said. "As more advertisers shift their dollars to the higher ROI on Facebook, we think growth will continue for years."

Intuitive Surgical (ISRG) is also in the rapid-growth bucket.

"Intuitive's robot (system) was starting to catch on in new surgical markets, especially for hernia cases," Kelly said. "They had become widely used for prostatectomies and hysterectomies, but growth there has lagged since their heyday. Our estimate of earnings growth was above the Street's for 2016 and '17 and perhaps '18."

In the current slow-growth economic environment, the managers think their best prospects are companies with fast or steady earnings and sales growth.

"We see the best opportunities in newer, faster-growing companies," Kelly said. "We also like consistent growth. We are substantially overweight in newer, faster-growing companies and consistent growers, and we are underweight in cyclicals."

Still, the managers -- Clark Winslow and Patrick Burton also run the fund -- don't hibernate during markets that tilt away from their strategy. "We took advantage of the broader pullback in the market in the spring," Kelly said. That's when the fund started its position in Intuitive Surgical.

Also, the fund increased its stake in UnitedHealth, another top-10 holding. It was taking market share in the Medicare Advantage and Medicaid markets, said Steve Hamill, health care analyst for Winslow Capital, the fund's subadvisor. And Optum, its health services business, "has been a tremendous growth business," Hamill said. It generates about 40% of UnitedHealth's earnings.

Among other holdings, Activision Blizzard's (ATVI) earnings per share jumped 44% and 315% the past two quarters. The company is shifting to online gaming, away from reliance on console-based video games. That boosts margins, Kelly says.

"Their next growth will come through e-sports, turning video gaming into a sport with spectators, such that people will go to Madison Square Garden to watch other gamers," he said.

Zimmer Biomet (ZBH) is a newcomer to the portfolio. The fund began its current stake in the spring. "Our thesis here is that this is a steady grower," Hamill said. "They're the leading company in orthopedic implants and some related surgical categories."

Fundamentals slid after the merger of Zimmer and Biomet, which closed in June 2015, due to redundant sales forces and other inefficiencies, Hamill says. But now the company has cut costs. And surgeons like Zimmer Biomet's products, Hamill adds.

Earlier this year, many Wall Street analysts expected the company to continue to lose share, especially in the hip and knee markets. "We think they will grow at least as fast as the market," Hamill said. He thinks the company's growth will be even better in the spine and trauma markets. Revenue growth and margin expansion will be key drivers, he adds.

The fund's institutional shares (MLAIX) carry no load and a 0.74% expense ratio. The $5 million minimum investment can be met at the plan or brokerage level.