Investor who’s beating the market by 30% with timely Amazon and Zoom buys is not celebrating yet

Investing

Signage is displayed outside Morgan Stanley & Co. headquarters in the Times Square neighborhood of New York.

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Dennis Lynch steers a mutual fund whose bets on Amazon and Zoom Video have helped it beat the market by more than 30% so far this year, but he isn’t isn’t ready to celebrate just yet.

The Morgan Stanley Insight Fund was one of the top 10 large cap growth funds last decade, according to Morningstar, with an annualized return of 17.11%. That success has continued so far in 2020 in dramatic fashion, with the fund rising by more than a third year-to-date, according to Morningstar.

Lynch described the fund’s performance so far this year as “relatively fortunate.” It ended last December with large positions in what proved to be hot stocks during the downturn, but there could still be challenges ahead, Lynch said.

“Times like these are just so unpredictable … it’s not over yet. Just because the market went down and went up doesn’t mean there’s a beginning and an end,” Lynch said. “In some way, when you’re an investor, it’s always a beginning. I think you need a long time to pass in order to judge whether or not you had a successful strategy or a successful period of decision marking.”

‘It’s not all one bet’

Lynch is the head of Counterpoint Global at Morgan Stanley Investment Management, which contains many funds. He said the Insight Fund serves as the “sort of our best ideas” product, and his team’s goal is to “collect what we think are highly unique companies.”

The fund, which has more than $3 billion in assets under management, is tech and software heavy, with Amazon and Slack holding the two biggest weights as of March 31, according to the fund’s website. Lynch said his investment team has a few main areas of expertise, such as tech and health care, but that a main focus is on identifying upcoming trends.

“We think, in general, that markets are complex, adaptive systems. They’re constantly evolving. It’s partly our job to continue to adapt to try to figure out what other people are missing and identify big ideas before the rest of the world does,” Lynch said.

The portfolio had a 93% turnover rate during its most recent fiscal year, but Lynch said that stocks that are removed from Insight are often still held by the other funds he manages. The fund also has a 0.65% management fee, a minimum investment of $1,000 and measures itself against the Russell 3000 Growth Index.

Though many of the biggest holdings are software names, Lynch said he believes the fund is well diversified within the sector.

“Within software, I think there can be different end markets, demands and exposures. It’s not all one bet,” Lynch said.

One of those software bets is on the pharmaceutical industry, in the form of Veeva Systems. The software stock is up nearly 40% year-to-date and has been a long-time holding of the fund.

“At a larger level we see it as a hub for best practices and (customer relationship management) and drug development and data management for pharmaceutical companies,” Lynch said. “And once you can become the company that does that well it sort of can be kind of self-fulfilling, in part. When you have all the large pharmaceutical companies already on your platform, it enables you to learn from their experiences and improve your service to them constantly.”

Investing in a crisis

A significant portion of the fund’s gains this year came before the pandemic hit and during the past month, when the broader market was rising. However, over the past three months — which includes the entire sell-off in the broader market — the fund has risen 14%.

Lynch, who has more than two decades of investing experience, said that in extremely volatile markets like what was seen in February and March, he has found it best to restrain himself from making quick decisions.

“Generally in a period like this we try not to be too active because it is often your emotional snap judgement that isn’t necessarily right. In fact, we’ve already seen that a little bit in two cases where companies that you would have thought might have weaker fundamentals as a response to this pandemic in a few cases have actually had the opposite,” Lynch said.

An example in the recent sell-off was Shopify, which has a heavy exposure to small businesses. But when the company reported its quarterly earnings, Lynch said, the results showed that the boost from the shift to e-commerce was offsetting the hit from small business struggles.

“It would have been very easy if you were in snap judgement mode to say ‘you know, I should sell some of this’ because of the obvious first-order exposure to small-medium business, and you might have missed the next part,” Lynch said.

PRO subscribers can read more about the fund’s big bets here.

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