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If you consider yourself a long-term investor, then the past few years have provided you with a lesson on how important it is to be patient.
Matt Moberg co-manages the $25 billion Franklin DynaTech Fund with Rupert H. Johnson Jr., who serves as the vice chair of Franklin Resources and helped found the fund in 1968.
“You have to be a long-term holder if you want to invest in innovation,” Moberg said during an interview with MarketWatch. He pointed to Nvidia Corp. NVDA, the fund’s largest holding, as an example. Moberg and Johnson first purchased shares of Nvidia for the fund in 2016.
“You need to have a 10-year view, not a three-year view,” he said, adding that concerns over Federal Reserve policy or economic events were more important to investors with shorter outlooks.
Back to Nvidia: From the end of 2016 through the end of 2022, the stock rose 455%. Great. But during 2022, Nvidia’s shares took a 50% dive. What more evidence do you need that a long-term investor must remain committed for many years?
Nvidia’s stock more than tripled in 2023. So far in 2024 it has risen another 92%. Here’s a look at numbers that might be comforting to long-term investors who are considering Nvidia even now.
Moberg said that when he and Johnson decided to buy Nvidia shares in 2016, he could not have predicted that the company, which had been a market leader for PC video cards, would wind up dominating the market for the graphics processing units installed by data centers to support their corporate clients’ deployment of generative-artificial-intelligence technology.
“You do not know when new innovations are going to hit, but you want to be prepared,” he said.
When discussing the top holdings of the fund, he said: “Our top 10 looks a lot like other peoples’ top 10s. The game is to find stocks earlier in the cycle.”
Moberg said that turnover within the portfolio is normally between 20% and 25% each year, and that the typical stock is held for four to five years. But among the largest 10 holdings, five have been held more than 10 years.
Moberg said that he and Johnson were “trying to find S-curves for adoption” among companies already showing accelerating paces for the growth of sales and earnings. Then they dig deeper to decide whether or not the company has “a long growth runway” springing from innovative products or services.
An example of a company that has made a big upward swing after losing investors’ faith a couple of years back is Meta Platforms Inc. META, the eighth-largest holding of the Franklin DynaTech Fund.
Following the pattern that so many investors suffered through with technology stocks, Meta’s shares sank 64% during 2022, after which the stock nearly tripled during 2023. So far in 2024, Meta has returned 42%. (All returns in this article include reinvested dividends.)
According to Moberg, one reason Meta keeps blowing past consensus estimates for revenue and earnings is that the company has made excellent use of its users’ data, enabling it to increase active users even for its oldest service, Facebook, as well as for Reels.
A current trend that Moberg believes will continue to blossom for investors over coming years is GLP-1 medications used for weight loss and to treat patients with Type 2 diabetes.
To invest along with the GLP-1 innovation trend, the Franklin DynaTech fund holds shares of Eli Lilly & Co. LLY. “We think there will be a long period during which they surprise investors with the size of the market for GLPs,” Moberg said.
When asked about Lilly’s competitor in the GLP-1 drug space — Novo Nordisk A/S NVO — Moberg said the two companies were the “clear winners” for this type of medication. But he sees a catalyst for Lilly because the Food and Drug Administration approved its Zepbound GLP-1 medication in November. This drug is aimed toward weight loss, while Lilly’s Trulicity and Mounjaro GLP-1 medications are used to treat Type 2 diabetes.
Keeping in mind that the type of innovation that has helped Nvidia dominate the GPU space is impossible to predict, Moberg provided an example of an industry that might be riding another wave of world-changing innovation: genomic medicine.
“We do not know when genomics will hit. Last year, more drugs were approved than over the previous five years. You want to be well positioned for when growth will happen,” he said.
Moberg went on to say that biotechnology innovation tends to take place within smaller companies, which are later acquired by larger companies or work with larger players to bring their products or services to market.
Since he cannot predict which small companies will be the best innovators in the genomics space, Moberg said the Franklin DynaTech Fund was holding shares of two companies that would be positioned to facilitate the rollout of genomic medications: Thermo Fisher Scientific Inc. TMO and Danaher Corp. DHR.
At the top of this article, you can see a chart showing how well the DynaTech Fund’s Class A shares have performed over the past 20 years, excluding sales charges, when compared with the S&P 500 .
Moberg said that on a rolling basis, “over the past 20 years, if you give us 10 years, we have outperformed the S&P 500 at month-end.”
But in any one year, the fund’s approach to innovation can lead to a large decline. The chart shows a high level of volatility — up and then down — in 2021 and 2022. This underscores that an approach focused on innovation requires a very long-term commitment. Otherwise, it can be too risky for an investor.
The fund has various share classes. The Advisor share class (FDYZX) is distributed through financial advisers and has no sales charge. It has annual expenses that total 0.57% of assets under management, while the Class A shares (FKDNX) have an expense ratio of 0.82%. All returns in this article are net of expenses.
So the Advisor share class is preferable, but it has only been available since 2010.
For 10 years through Monday, the fund’s Advisor shares returned 318%, while the Class A shares returned 308% and the S&P 500 returned 237%.
Sourced from Market Watch
