The managers of DF Dent Midcap Growth (symbol DFDMX), a member of the Kiplinger 25, our favorite low-cost mutual funds, are back in the office after months of remote work. But the quarantine did not hold them back. Midcap Growth returned 13.2% over the past year—far better than the 1.6% loss in the Russell Mid Cap index. Some of the fund’s best performers over the past year were software firms, including BlackLine (up 45%) and Ansys (up 37%). Shares in financial-services firm Moody’s rose 41%.
A few holdings that lost ground were COVID casualties, in part. Insurance company Markel (down 12% over the past 12 months) suffered from its exposure to business-interruption claims filed because of the shutdown. The travel slowdown has hurt digital-commerce software provider Pros Holdings (PRO) (down 32%); the airline industry is a key customer. Despite the declines, comanager Bruce Kennedy says he has “strong confidence” in these businesses.
Kennedy and his comanagers, Matthew Dent, Gary Mitchell and Thomas O’Neil, work to find 30 to 40 growing midsize businesses that generate large amounts of cash, dominate a niche in their industry, and have talented and ethical executives. They wait for a stock to trade at the right price relative to its expected risk-adjusted return before buying. “We’re picky, and we do deep research,” Kennedy says.
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At the end of 2019, the fund’s cash position rose to 5% of assets because there were “more names we wanted to sell than to buy,” Kennedy says. When stock prices collapsed, the managers deployed that cash, as well as more cash raised by trimming stakes in a few top performers, into four new stocks: Heico (HEI), a seller of aftermarket aircraft parts; veterinary diagnostics company Idexx Laboratories (IDXX); and software firms Atlassian (TEAM) and Coupa Software (COUP). Cash is now just 1% of assets.
In recent years, the fund has expanded its research bench and hired five analysts. “They’ve been instrumental in reducing the number of mistakes we make,” says Kennedy. The fund has been on a torrid run of late. Over the past three years, Midcap Growth has returned 19.0% annualized, beating the 5.3% average annual return of the Russell Mid Cap index.
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