DJ Charting A Course to Stock Stars -- Barron's

By Debbie Carlson

Portfolio managers of big mutual funds don't often rely heavily on technical analysis as part of their investment process. But for the managers of the $8.1 billion Lord Abbett Growth Leaders fund, it's part of what makes them unique.

"We are fundamental analysts who are guided by charts," says Thomas O'Halloran, 66, partner and portfolio manager.

Fundamental analysts sometimes deride technical analysis, saying the study of stock price and volume movement is too short term to be useful for long-term holdings. But O'Halloran says the three-person management team -- which includes Vernon Bice, portfolio manager, and Matthew DeCicco, partner and director of equities -- integrates several price-momentum measurements to gauge rising and falling price trends into their fundamental research. This combination gives them the confidence to hold large positions in as many of the big growth-stock winners as possible.

Supplementing traditional analysis with chart trends seems to be working. Growth Leaders (ticker: LGLAX) has beaten its benchmark index, Russell 1000 Growth, and at least 94% of its category peers on a one-, three-, and five-year basis. The fund, which turns 10 years old in June, has a below-average expense ratio of 0.9%.

Southampton, N.Y.--based O'Halloran started at Lord Abbett in 2001 as a technology analyst on the small-cap growth team, following more than a decade at investment bank Dillon, Read and a five-year law career. He has been with Growth Leaders since its 2011 inception. Bice is the fund's main technical-analysis guru.

Growth Leaders looks for innovative companies benefiting from technological disruption, particularly in the consumer discretionary, communication services, technology, and healthcare sectors.

In addition to technical analysis, the fund's investment process includes evaluating a firm's potential and operating momentum. To assess potential, the team looks for profitable businesses that can scale, or that have annuity-like revenues. They also seek market-leading companies with strong management, and consider the health and size of the company's particular market. When assessing operating momentum, O'Halloran and team review earnings, zeroing in on revenue growth, which they consider the most important measurement for innovative growth companies.

Though Growth Leaders isn't considered a sustainable fund, the group also evaluates a firm's environmental impact and how it treats its employees and business partners. "We've seen the market tell us that we need to start factoring it in," O'Halloran says, noting that companies conscious of these issues are carrying higher valuations.

Another way the fund stands out is how all three managers have small-cap backgrounds, which they use to diversify holdings. The fund does have a little wiggle room to add smaller names, as they believe smaller-cap companies will be stock market winners for a few years.

One example of a smaller-cap, sustainable business is DocuSign (DOCU), the leading cloud-software signature provider, which the fund bought in September 2019, O'Halloran says. Digital signatures can eliminate paper forms. "That has very positive environmental benefits, which we think will provide a long-tailed growth opportunity," he adds.

To help select stocks and sectors, O'Halloran uses a psychological theory, Abraham Maslow's Hierarchy of Needs, which says that people are motivated by five categories of needs, including safety, self-esteem, and self-actualization. Innovative companies often go to sectors where people spend money on their needs, he says.

A firm tapping into one of those needs, and with significant growth potential, is Align Technology (ALGN). The company makes clear teeth aligners, which are much more visually subtle than metal braces. Clear aligners only have a 15% penetration in the worldwide orthodontic market, and O'Halloran believes these will eventually replace all metal braces.

"Straight teeth are a big deal," he says. "They have a powerful impact on self-esteem, which allows for self-actualization."

Growth Leaders has owned the stock off and on in the past decade, but most recently bought it again in October 2020, after strong sales growth pushed the stock price above its three-year high.

Digital money should continue to become popular, and O'Halloran considers Square (SQ) to be the most creative large-cap fintech company. "Its Cash App has been a huge innovation that will allow it to take chunks of market share from banks," he says. Growth Leaders first bought Square in January 2020 and increased its position in March and again later in 2020.

O'Halloran estimates that his investment style falls out of favor about 10% to 15% of the time, but when it does, the drops can be dramatic. 2016 was a tough year, for instance, as value stocks outperformed growth. But O'Halloran says problems started in the last quarter of 2015 when the team waited too long to sell growth holdings, and then they missed out when growth stocks rebounded.

To rectify the situation, the fund added more analysts, allowing DeCicco to become a full-time portfolio manager. Bice also took a more disciplined approach toward which technical signals to use, to eliminate short-term market "noise," O'Halloran says.

Currently, 40% of the portfolio is in technology, slightly less than the Russell 1000 Growth's 45% weighting. The fund trimmed its position in some tech giants when concerns about potential stricter government regulations dented their stocks. The regulatory risks are real, but O'Hallaron isn't giving up on the Apples (AAPL) and Microsofts (MSFT) of the world -- the fund's No. 1 and No. 3 holdings, respectively. These are great companies with annuity-like revenues, he says.

In a market selloff, these quality companies may provide a ballast to portfolios, he says: "If we had a bear market, which wouldn't surprise me at all, then I think we would (want to) own more of them."

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March 12, 2021 21:30 ET (02:30 GMT)

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