Mike Kerr, a principal investment officer of The Growth Fund of America®, shares his thinking on industries and companies currently held in the fund, including technology, entertainment and health care.
Will McKenna: You are now one of the two principal investment officers on the fund. You’ve been in the fund 18 years or so.
Mike Kerr: Yes.
Will McKenna: Let’s look at some of the themes in the portfolio. We’re currently favoring technology companies. Tell us more about why. Is it disruption? Is it that they’re the real wealth creators? How do you think about it?
Mike Kerr: All around the world, there are these very, very large, but increasingly dominant, companies in technology. And there’s a survivor bias that, in technology, the company that survives and dominates and wins gets an enormous prize.
Will McKenna: So winner take most or —?
Mike Kerr: Yes. So if you think about the global reach we have in the-- Taiwan Semiconductor is a company that’s in the portfolio. It’s absolutely important and dominant in so many ways. It’s actually almost an irreplaceable company. They have capacity and ability to design certain of these newer chips that-- First, they have enormous capacity; they have capacity that can’t be replicated. Second, some of these newer chips being used in all these newer products — they’re the dominant supplier. And they almost get to dictate price now on some of their leading-edge products. So that’s an example.
And then you can go around and take, say, Broadcom, within the cell phone [industry] — there are certain chips in the cell phone. They [Broadcom] are simply irreplaceable and dominant. And that’s what’s interesting. I can go around technology and give you more examples like that. So that’s an area where it’s kind of great to have that aspect of a Growth Fund of America because we’re going to give you exposure to that.
Will McKenna: And then — obviously, none of these are an investment recommendations per se — but a lot of people own Amazon. How do we have a differentiated view? Or where do you see us having differentiated views in elements of either those companies or others? How do we have that?
Mike Kerr: The thing that makes me more confident is it isn’t just the usual reasons, the obvious stuff that Amazon does. But our research team is-- there’s all this stuff on the very edge that we’re doing enormous research on. And Amazon has the Amazon Prime offer — right? — in video. We’re on top of that. We’re monitoring that as closely as anybody and probably with better knowledge than most people.
Will McKenna: And see it from probably different light, different angles.
Mike Kerr: And that also helps us with our other investments, because Netflix and Amazon: where’s that leading us? What’s going on in content?
Will McKenna: Vis-à-vis, the cable companies?
Mike Kerr: Yes. And then you have Comcast. So we have that stuff going on, which gives me tremendous options. Then with Amazon, the other thing is that we were totally on top of — I think well before it was even written about on Wall Street — but Amazon, you always hear about the cloud and —
Will McKenna: Sure.
Mike Kerr: We’re writing software so people can store just data in the cloud and save an enormous amount of money in their own right. And actually, we made two purchases: Amazon’s a big part of our fund, but so is Microsoft.
Will McKenna: Right.
Mike Kerr: We saw that, basically, Amazon is the dominant company, but Microsoft is going to be the number two and probably very competitive in the enterprise space, in the cloud. And unfortunately, Google [Alphabet] is not going to be a big player. So we understood that and we identified that. And that has given us some real reasons besides the ones you usually read about — why these companies should be part of our portfolio, maybe a top-10 position in our portfolio.
Will McKenna: Let’s switch gears and talk about health care: meaningful holdings in the fund, in Growth Fund and elsewhere. These have been great stocks, but obviously [have] some real challenges of late. How are we approaching that area?
Mike Kerr: Within the area, there are companies that are perceived as fine and winners, and they’ll be just fine. So you can buy a Humana because you think-- in almost every scenario, Medicare Advantage is going to be funded and grow. And I think a number of participants in Medicare Advantage-- it’s a growth industry. Those are stocks you can buy, and I don’t think there’s actually a lot of risk to it.
Where you have a lot of risk is in the companies like Express Scripts. The whole purpose of Express Scripts to negotiate price on the part of their clients and then get paid for rebates — it’s messy, to put it mildly. It’s messy. But if the government negotiates price for drugs, they’re going to have a bunch of voters-- when they don’t reimburse for a certain drug, they’re going to have voters upset. Express Scripts does it, and they negotiate for the government. That’s an area where we’re doing a lot of work, but that’s where it’s a little more risky because I think the business model is under siege, is under discussion. But the value is obvious. If the business model survives, it’s going to be a lot of money made.
Part of health care, you have to look at the companies where you’re very sure. UnitedHealth [Group], the valuations of those stocks are 15 to 18 times earnings, so the market kind of recognizes that. Or you can have Express Scripts selling at nine times earnings, and you have to make the decision, “How much of that do I want?”
And that’s the sort of work we’re doing.That’s the advantage of this place, because we have the long-term vision.
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