This Morgan Stanley Fund Is Up More Than 100% This Year Thanks To A Flexible Strategy (2024)

Want to talk about the best mutual funds? Dennis Lynch is lead manager of Morgan Stanley Insight Fund (CPODX), one of the mutual fund industry's heavyweight champs.

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His $6.5 billion portfolio is a 2020 IBD Best Mutual FundsAward winner. It won that distinction by topping the S&P 500 in calendar 2019 as well as over the three, five and 10 years ended Dec. 31.

What has Morgan Stanley Insight done lately? Year to date through Nov. 30, the Morgan Stanley fund was on track to repeat as an IBD Best Mutual Funds Award winner. Its 115.57% year-to-date return dwarfs the S&P 500's 14.02%. It was fourth best among all U.S. diversified stock funds tracked by Morningstar Direct.The fund's large-cap growth rivals averaged 30.19%.

The fund ranks in the top 1% of its peer group's performance leaders so far this year and over the past three, five, 10 and 15 years.

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Best Mutual Funds: This Morgan Stanley Fund Bets On Innovation Leaders

What sort of fund does Lynch run? The portfolio, which Lynch runs with colleagues Sam Chainani, David Cohen, Armistead Nash, Alexander Norton and Jason Yeung, includes household names like e-commerce titan Amazon.com (AMZN), videoconferencing mainstay Zoom Video (ZM) and Moderna (MRNA), one of the leaders in the race to produce a vaccine for Covid-19, the disease caused by coronavirus.

The portfolio also features lower profile names like Veeva Systems (VEEV), Shopify (SHOP) and Covetrus (CVET).

Veeva is a cloud-based software firm. Shopify enables client businesses to establish a web presence. And Covetrus makes health supplies for veterinarians.

Lynch, who is 50 years old, talked on Nov. 17 with IBD about his investing approach from his home in New Jersey.

Flexibility Is A Key To Success

IBD: Why did this fund recently change its name from Multi-Cap Growth, Dennis?

Dennis Lynch: Language matters to us. It's good to consider the impact of language on how you think about decision making. The last time you and I spoke, many of our funds used conventional nomenclature, which emphasizes compartmentalized funds: funds that fit one of the Morningstar nine size-and-style boxes.

But this fund's approach emphasizes flexibility. "Multi-Cap Growth" is boring and conventional. "Insight" reflects what our team is trying to achieve. It's a broader approach.

IBD: The bulk of your holdings are large caps. But 20% were mid- and small caps as of Sept. 30. Is that the flexibility you're talking about?

Lynch: Our benchmark is the Russell 3000 Growth Index, which is small- to large-cap U.S. companies. So we're different from your garden variety large-cap growth fund. We can look for opportunities outside the large-cap area.

In the last decade, there's been an emphasis on companies that have done well like Apple (AAPL), Amazon, Google (whose parent is Alphabet (GOOGL)) and Facebook (FB). But those aren't in the portfolio, except for Amazon.

Flexibility lets us go where the best opportunities are.

The Only FAANG Stock This Morgan Stanley Fund Owns

IBD: Tell me your thesis for Amazon, the one FAANG stock you do hold.

Lynch: We've owned it since 2003. Historically and currently, it has one of the best competitive advantages. It's not just an internet company that's digital. It's the ability to aggregate demand that's the key.

Another key is that it took them years to build a physical logistics infrastructure. That's hard for rivals to replicate quickly.

That combination is compelling. Then there's the company culture, Jeff Bezos' willingness to constantly experiment that led to other great business developments like Amazon Web Services.

Its competitive advantage makes its future bright, just less bright than when it was much smaller.

How Veeva Systems Helps Make This One Of The Best Mutual Funds

IBD: Veeva Systems' software helps clients manage sales and operations as well as comply with regulations. It's expanding beyond life sciences.

Lynch: Veeva's software enables customers to track everything from their customer relationships (CRM) to their drug development process. The regulatory component means you need strong and constant data management.

This company has a culture of innovation. They started in CRM in pharmaceuticals and life sciences. They're expanding into areas like cosmetics. Ultimately they may go into the financial services world.

Their business has a lot of recurring revenue. Customers are sticky and face high switching costs if they wanted to make a change. Veeva will continue to increase their total addressable market.

Why Dennis Lynch's Morgan Stanley Team Likes This Alternative To Amazon

IBD: Shopify provides small- and medium-size businesses with an alternative to selling their goods as third parties on Amazon. Shopify provides them with their own websites, right?

Lynch: Tobias Lutke, their founder and largest shareholder, refers to what Shopify does as arming the rebels.

Having your own website means you control the customer experience and loyalty. And like Veeva, it's almost hard for businesses to not join Shopify, given their value proposition.

Also, Lutke has lots of skin in the game. We like that. He has a culture focused on reinvestment and experimentation vs. generating lots of earnings right now. We want companies that can grow much bigger.

Manager Of One Of The Best Mutual Funds Explains Stake In Covetrus

IBD: Covetrus (CVET) is a relatively low-profile stock. What do you like about it?

Lynch: It formed out of the merger of Henry Schein Animal Health, a pharmaceuticals distribution business, and Vets First Choice, which enables veterinarians to better manage prescriptions to their clients.

The combined company is similar to Amazon. It's a distribution and technology platform. It lets you cross sell new products to the old Henry Schein clients. And it accelerates adoption of Vets First Choice through the veterinarian industry. It's increasingly becoming the standard for pet care and drug compliance.

One Of The Best Mutual Funds' Managers Forecasts Zoom's Future

IBD: Zoom Video Communications (ZM) has benefited from the work-from-home dynamic of the coronavirus pandemic. Does the prospect of Covid-19 vaccines mean that Zoom is vulnerable to a sharp pullback in usage?

Lynch: CEO Eric Yuan took an enterprise product and released it to the world to help during a crisis. He deserves credit for that. He also got a lot of feedback about how they could make the product better, especially for consumers, and more secure.

It's hard to know what will happen if we get back to some normalcy with vaccines and the ability to convene groups of people the way we used to. But we believe the wide adoption of Zoom not just by corporations but also individuals make it almost a standard (for teleconferencing). With the opening oftheir API (Application Programming Interface, which is software that lets two applications talk to each other) and their events store, we suspect a lot more business will be done in this manner.

It's far more efficient to use Zoom than to spending time and money to fly across the country to meet someone.

Why Morgan Stanley's Lynch Expects Coupa To Keep Growing

IBD: Coupa Software (COUP) produces cloud-based spending management software that tells enterprises where they can cut spending and how to use their financial resources more efficiently, right?

Lynch: You're right. Clients can access existing and new suppliers, and the platform makes it easier to manage expenses and look for alternative suppliers and costs.

We believe there is a network effect. And Coupa takes a small percentage fee of each transaction, so there's potential to be more profitable.

There's also potential for facilitating actual payments themselves between companies.

Twilio Provides A Growing Platform

IBD: Is Twilio (TWLO) another company that is making itself into the dominant operator of a platform that's becoming the leader in its niche — in this case, a platform for real-time communications?

Lynch: They've created an API that's a software standard for point-to-point communications. Like when you order a pizza: In the past you had no idea when it would arrive. Now you get alerts about it being made, leaving the store, getting near your house.

Twilio's core product enables that texting and interaction both ways. As that communications grows, Twilio gets bigger and bigger.

And they provide data and consumer insights to some companies and advice about how to use that data.

One Of The Best Mutual Funds Doesn't Care That Overstock.com Is An Also-Ran

IBD: I gather that more and more investors think of Overstock.com (OSTK) asmore than just an online-retail also-ran. Why is that?

Lynch: The company has a subsidiary, Medici Ventures, that has a large portfolio of venture-capital type investments in blockchain technologies. (Blockchain is a digital ledger that keeps records of transactions in virtual currencies.)

Keep up with the latest news about Bitcoin (GBTC), additional cryptocurrencies and related stocks.

Medici's largest asset is tZero. That's an SEC-regulated alternative trading system and marketplace for trading digital security tokens. Those trades settle immediately (without an intervening settlement period, which can be as long as days). Theoretically, all assets can be tokenized and exchanged in this way.

There's a lot of value in owning this sort of platform if this asset class takes off.

Follow Paul Katzeff onTwitter at @IBD_PKatzefffor tips about retirement planning and active mutual fund managers who consistently outperform the market.

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