TCW New America Premier Equities (symbol, TGUNX) has been white-hot since its 2016 launch. The large-company stock fund's 25% annualized return since February of that year blitzed Standard & Poor's 500-stock index by an average of more than 10 percentage points annually. New America outpaced more than 90% of its peers in each of the past three calendar years, including so far in 2019.
New America uses environmental, social and governance factors to choose stocks. But fund manager Joseph Shaposhnik says he isn't out to save the world. Rather, he believes the ESG screen he employs helps him find high-quality, excellently managed businesses worth examining further. The screen looks at traditional sustainability factors, such as carbon emissions, but it skews toward governance criteria, such as gender and ethnic diversity among members of the management team, and sensible executive compensation. Only 200 to 300 companies make the initial cut.
From there, Shaposhnik hunts for reasonably priced firms that log hefty amounts of recurring revenue and that operate in industries unlikely to be affected by economic cycles. The most important attribute for stocks in Shaposhnik's portfolio is robust free cash flow—cash profits after expenses and long-term outlays to improve the business—that is increasing at an accelerating rate. How a firm spends its excess cash matters, too. Shaposhnik wants to see excess capital devoted to acquisitions or in-house growth projects. "I'm not looking for firms that pay dividends or repurchase shares. Those are less efficient uses of capital," he says. Top holdings in the fund include software maker Constellation Software, tech behemoth Microsoft and data analytics firm IHS Markit.
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New America's portfolio comprises only 33 stocks and is heavily focused. Technology and industrial firms account for 68% of the portfolio, and 50% of assets are invested in the top 10 holdings. Shaposhnik says the most stable stocks get the heaviest weightings in the portfolio, so despite its big bets on a few names, the fund hasn't been especially volatile. Since the fund's inception, New America has been only 4% more volatile than the S&P 500.
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