In the middle of 2020, DF Dent Midcap Growth (DFDMX) was one of the best-performing diversified U.S. stock funds in the Kiplinger 25. Back then, its 12-month return handily beat the broad market, as measured by the S&P 500. The fund held up even better than the index in the pandemic-driven bear market.
But over the past 12 months, the 20.8% gain in DF Dent Midcap Growth, although solid, trailed 84% of its peers (funds that invest in midsize, growing companies). It lagged the S&P 500, too, as well as its benchmark, the Russell Mid Cap Growth Index. The fund favors high-quality, growing companies, but in late 2020, investors began to favor low-quality firms trading at bargain prices.
DF Dent Midcap Growth's limited exposure to tech stocks relative to its benchmark was also an issue. The fund tends to hold roughly one-fourth of its assets in tech stocks; the tech-stock weighting in the Russell Mid Cap Growth Index topped 40% at its peak.
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"While our tech stocks have done very well over the past three years, we have been trimming our positions due to higher valuations. We think that is prudent risk management," says fund comanager Bruce Kennedy. The fund managers pared stakes in software firms Ansys (ANSS) and BlackLine (BL), among others.
Kennedy and 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. Among the fund's top holdings are real estate investment trust SBA Communications (SBAC) and Vulcan Materials (VMC), which makes construction products such as crushed stone.
Over longer stretches, this process has delivered consistent, market-beating returns. In each of the past three-, five- and 10-year periods, for instance, DF Dent Midcap Growth has posted annualized returns that outpace the typical mid-cap growth fund, the Russell Mid Cap Index and the S&P 500. That's a compelling sign that the fund will soon shine again.
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