A Low-Risk Growth Fund That Finds Winners in Unexpected Places

Co-managers Brian Demain and Philip Cody Wheaton seek companies that have not just recent but sustainable long-term growth, and they don’t want to overpay for stocks. The average price/earnings ratio for the fund’s holdings is 19.0, versus 26.6 for the average Mid-Cap Growth fund, according to Morningstar. As of Aug. 31, the fund had a 26.0% tech weighting, which is greater than its Russell Midcap Growth benchmark’s 21.8%. But the fund isn’t in the familiar tech names.

One stock the team has been adding to lately is
WEX
(WEX), a financial technology company. “They have a couple of businesses, the largest of which is fuel cards for trucking fleets,” Demain says. Instead of giving truckers general-purpose corporate credit cards, employers give them WEX fleet cards specifically for refueling their vehicles at gas stations. WEX has a duopoly in this business with FleetCor Technologies (FLT), so its profit margins are high. It also has growing business lines in administering health savings and flexible spending accounts as well as in processing virtual credit-card payments. “The company has a strong competitive position around each of its three businesses,” Demain says.

While tech stocks are staples for growth fund managers, more surprising is the fund’s hefty 24.0% industrial sector weighting. “We’ve added a lot to industrials over the last year,” says Wheaton. Though U.S. industrial production was largely not a growth area through most of the 2010s, geopolitical problems with China and the pandemic are causing companies to reorganize their supply chains.

“Especially when it comes to strategically important products like semiconductors, EV batteries, and medical devices, we’re realizing that we need to restore that manufacturing to the U.S. That has the potential to drive some volume growth within the industrial space that has been lacking over the last couple of decades,” Wheaton says.

Trucking logistics company
TFI International
(TFII) is one industrial holding that should benefit from the reshoring trend. TFI specializes in less-than-truckload, or LTL, shipments—“when you’re sending more than a parcel but less than a full truck,” Demain says. “The less-than-truckload carriers effectively run a logistics network that aggregate these shipments at central warehouses from different places around the metro area and then run a truck to the metro area where it’s going and redistribute the products.”

While trucking is normally a commodity-like business with low profit margins and barriers to entry, TFI’s warehouses and distribution network makes it much harder for competitors to horn in on its business.

Consistent growth and positive macro trends aren’t enough for the team to buy a stock. Companies should have prudent CEOs who allocate capital carefully, be it to make acquisitions, invest in research and development, pay dividends, or buy back stock. TFI originally acquired its LTL business from
United Parcel Service
(UPS) in 2021.

“The management team at TFI are phenomenal operators,” Demain says. “They have been able to recognize a lot of cost savings out of the UPS business. We think there’s more to come in that they’re prudent allocators of capital.”

Perhaps the most surprising sector the team has been moving into recently has been government-regulated utilities such as
Alliant Energy
(LNT), as utilities aren’t normally thought of as growth stocks. “Utilities typically earn a regulated return on the capital they spend and invest in the business,” Wheaton says. “Right now, they have a very long and visible runway of spending on things like renewable power generation, and grid hardening [i.e., storm and other risks prevention], which is strategically important after the fires that we’ve seen over the last couple of years in California and most recently in Hawaii.”

Such investments actually save the utility money in terms of maintenance and efficiency. “If you put your transmission lines underground and they don’t have trees falling on them or get hit by lightning, that’s good for safety,” Wheaton says. “That also means you have to roll less trucks out to go and handle downed power lines, so you’re cutting costs, too.”

He argues that utilities like Alliant will increase their earnings between 6% to 8% annually on top of having dividends in the 3% to 4% range currently. “That’s a high single-digit, low double-digit total return profile,” he says. “But we think they’ll be able to maintain that type of return profile for a decade or more.”

Wheaton also likes that Alliant has already proven itself good at containing operating and maintenance costs and that it services the Midwest, which has less climate risk than coastal regions. Alliant has a 3.5% dividend yield.

While other growth managers have been riding the momentum of semiconductor stocks in the artificial intelligence boom, Demain and Wheaton have been cutting back on microchip stocks on valuation concerns and instead adding aggressively to healthcare companies like
Revvity
(RVTY) and
Waters
(WAT), which have recently lagged behind.

Such companies produce what Demain calls life-science tools and should benefit from the growth in biotech drugs without having to seek regulatory approval.

“Think of life-science tools [manufacturers] as the companies selling the pickaxes to the biotech and pharma miners,” he says. “These are various reagents, and equipment for research and development processes for biotechnology production.”

Email: [email protected]