The $5.8 billion Putnam Sustainable Leaders Fund (PNOPX) reached the ranks of the best mutual funds. It does that by combining its search for leading stocks with its pursuit of companies that are committed to sustainable business practices — also known as ESG investing.
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ESG investing means finding businesses whose products and services boost sustainable environmental, social and corporate governance practices.
Managers Katherine Collins and Stephanie Dobson do that by aiming for firms whose ESG actions are woven into their business.
In contrast, many other ESG investors seeking companies whose sustainability traits are incidental add-ons to their daily business, Dobson says.
Further, Collins says their focus on sustainability aids their performance. It steers them toward companies that are made stronger by their commitment to ESG practices, she adds.
Best Mutual Funds: Where ESG Investing Fuels Fundamentals
“We’re looking to identify companies that are doing great things in the sustainability areas that are most relevant to their specific businesses,” Collins said. “They are creating a better long-term fundamental outlook. We’re not looking for situations where sustainability and fundamentals happen to coexist. We’re looking for situations where excellence in sustainability is fueling excellent long-term fundamentals.”
Collins and Dobson have found that mix in leading stocks like Chipotle Mexican Grill (CMG), Microsoft (MSFT) and Target (TGT).
How Facebook And Netflix Fall Short On ESG Values
They also hold popular megacap favorites Apple (AAPL), Google-parent Alphabet (GOOGL) and Amazon.com (AMZN). Why don’t they own the other two FAANG stocks, Facebook (FB) and Netflix (NFLX)?
Dobson says it’s mainly due to three factors. First, a need for diversification in a portfolio that is somewhat concentrated. It owned 65 stocks and other holdings as of Jan. 31. The technology sector accounted for 30% of shareholder money as of Dec. 31. Consumer discretionary was another 16%.
Second, the managers want stocks with compelling valuations. Third, Dobson and Collins want companies that are leaders in the pursuit of ESG principles. “We’re looking for leadership in a few elements: data security, customer privacy, overall customer well-being,” Dobson said.
Collins added, “Companies we own go above and beyond compliance with sustainability (principles) such as those to create capabilities that will be long-term assets.”
She added, “In stocks we don’t own, that’s not the case.”
What Type Of Stock Does A Best Mutual Fund Seek?
Collins and Dobson’s approach leads to a portfolio whose holdings make sense to CAN SLIM investors. Five of its stocks were recent members of the IBD Leaderboard.
An additional four holdings were members of the IBD 50.
Another six holdings had IBD Composite Ratings of 90 or higher.
Chipotle Serves Up Antibiotics-Free Food
Leaderboard-member Chipotle helps Sustainable Leaders stay among the best mutual funds. Its shares rose 70% over the 52 weeks going into Wednesday. Earnings per share grew an average of 20% annually over the past three years, says IBD Stock Checkup. They’re expected to climb another 114% this year, according to analysis by MarketSmith.
Dobson says the coronavirus pandemic accelerated the fast-casual restaurant chain’s shift to encouraging customers to order takeout digitally rather than relying on sit-down meals.
The digital format boosts same-store sales and raises margins, Dobson says. And despite many stores closing, the chain’s same store sales held up “pretty well” over the past year, she adds. “There’s a view that we subscribe to that says when we see the core in-store business return, we won’t see digital sales evaporate,” Dobson said.
She also expects to see benefits as the chain expands innovations like drive-through facilities.
A key ESG investing value baked into Chipotle’s business is its avoidance of antibiotics in chicken and other meats, Dobson says.
Azure Does Not Compete With Its Customers, Dobson Says
Microsoft is another Leaderboard holding. It’s also another stock that helps Sustainable Leaders stay in the winner’s circle of best mutual funds.
Shares have climbed 33% in the past 52 weeks. EPS grew an annual average of 22% the past three years. EPS is seen rising another 28% this year.
The company’s sustainability practices help fuel that growth, Collins and Dobson say. For one thing, CEO Satya Nadella’s advocacy of customer data privacy has fostered customer trust, Dobson says. “Also, Azure is not competing with its customers in a lot of businesses, which some other cloud providers are,” she said.
Further, Microsoft has ambitious environmental and social-impact goals. “They’re aiming for a net negative carbon footprint,” Collins said. “That has terrific cost benefits. Data centers are energy intensive.”
Reducing its carbon footprint helps Microsoft customers too. “It’s important to them to be able to verify their own environmental benefit statistics,” Collins said.
She added, “Also, they’ve made terrific strides in terms of their own internal diversity and equity inclusion efforts, which are broadening their access to talent.” In turn, that boosts the effectiveness of Microsoft’s products.
Targeting Curbside Pickup
Target, a Leaderboard stock, also helps Sustainable Leaders keep a grip on its perch among the best mutual funds.
Shares rose 64% the past year. EPS rose at a 17% annual clip the past three years. They’re expected to jump another 44% this year.
With investments in online shopping and curbside pickup, Target has reduced the need for customers to hop into cars to visit stores. It has also reduced the need to find parking spaces at stores.
In addition, Target has developed store brands that are less polluting. “And they’ve developed internal brands that rely on advanced supply chain management and ethical sourcing, which have become multibillion-dollar brands in some cases,” Collins said. “There’s a connection between investments and what matters to customers.”
Best Mutual Funds: Set To Repeat As A Winner
What makes this portfolio one of the best mutual funds? The fund is a 2020 IBD Best Mutual Funds Awards winner, having topped the S&P 500 in calendar 2019 as well as over the prior three, five and 10 years on an average-annual-return basis.
It outperformed in 2020 as well, 28.51% vs. 18.40%. That means the fund will repeat as an IBD Best Mutual Funds Awards winner this year.
In the roughly 35 months since the fund made sustainability part of its name, the fund’s average annual return has been 19.97% vs. 15.71% for the S&P 500 and 21.25% for the fund’s large-cap growth peers tracked by Morningstar Direct.
Follow Paul Katzeff on Twitter at @IBD_PKatzeff for tips about retirement planning and active mutual fund managers who consistently outperform the market.
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