This Leading Franklin Fund Focuses On Innovation, Some Pre-IPO Bets

The $5.7 billion Franklin Growth Opportunities Fund (FRAAX) ranks among the best mutual funds. The crux of its approach is focus on innovative, fast-growing companies. “We’re not looking for necessarily the hottest companies,” said lead manager Grant Bowers. “Our focus is on quality. We want fast growers that can sustain that growth for three to five years at least.”


To do that, Bowers and manager Sara Araghi have diversified. The bulk of their holdings are large-cap and midcap stocks.

But Bowers and Araghi are also willing to buy a small number of small caps before they are publicly traded, like a company called Proterra. Proterra plans to go public through ArcLight Clean Transition (ACTA), a special purpose acquisition corporation (SPAC) that the fund also holds.

“Proterra is the leader of commercial or transit vehicle EVs, electric vehicles,” Bowers said. “It was founded by several ex-Tesla (TSLA) executives. They have over 1,000 vehicles in operation. They’re way ahead of their competition.” Proterra products include batteries and storage systems.

Best Mutual Funds: How This One Plays The Reopening

Bowers and Araghi hope that entrepreneurial seeds like Proterra will help Growth Opportunities remain among the best mutual funds.

In addition, Bowers and Araghi are playing the U.S. economic reopening.

The fund holds restaurants Chipotle (CMG) and Starbucks (SBUX) and travel-booking service (BKNG). “There is tremendous pent-up demand being unleashed,” Bowers said. “Consumers are racing to catch up on life. Another stock we have exposure to that will benefit from that demand is Mastercard (MA).”

SBA Is A Bet On 5G Wireless Demand

The fund also wants tailwinds from federal policies to help keep it one of the best mutual funds. “One area that should benefit from Biden priorities is the green energy business,” Bowers said. “Our investment in Proterra is an example of how we’re trying to benefit from that.”

Bowers said, “A lot of the Biden infrastructure bill’s focus (at this moment) is on technology infrastructure. So companies involved with broadband access and expansion, 5G wireless infrastructure will be big beneficiaries.”

Bowers added, “One beneficiary there we own is SBA Communications (SBAC), the wireless tower company. They are uniquely positioned to benefit from 5G.”

SBA Communications owns and runs wireless communications facilities, including buildings, antenna systems, rooftops, small cells and towers. The spread of 5G coverage means more demand for the types of assets owned and run by SBA.

The Value Of Long-Term Secular Innovation

Most of the fund’s investments are sustainable growth plays that reflect long-term secular innovations. They are thriving without need of any boost from the government or an economic recovery.

Nvidia (NVDA), PayPal Holdings (PYPL) and Microsoft (MSFT) are three. Each happens to be a recent member of the IBD Leaderboard.

Leaderboard is IBD’s curated list of leading stocks that stand out for their technical and fundamental prospects.

Nvidia Helps Make This One Of The Best Mutual Funds

The aces in Nvidia’s hand are its graphics processing units. Those GPUs are programmable and perform fast math. That makes them vital to applications from video games to computer graphics, artificial intelligence (AI) and autonomous vehicles. “They’ve also come in with the best solutions in some of the fastest growing areas of technology spending,” Bowers said. “And they’ve made great acquisitions.”

One was last year’s acquisition of Mellanox Technologies, “which expanded their opportunity in data centers,” Bowers said. “Nvidia’s revenues in data centers are about $7 billion. Many analysts think that is a $100 billion market. So Nvidia has tremendous long-term upside in that business.”

Best Mutual Funds: PayPal’s Place In Digital Payments Ecosystem

PayPal’s appeal is that “it truly sits in the middle of this giant digital payments ecosystem, and they’ve delivered great products,” Bowers said.

PayPal’s product lineup starts with its core PayPal platform. “They’ve added Venmo for the fast-growing social payments (peer-to-peer) business,” Bowers said. “That’s growing 60% plus a year.

He added, “And they have their Braintree platform for e-commerce. It connects customers with online sales platforms and it’s growing incredibly rapidly.”

PayPal’s latest payments novelty is a QR code or Quick Response code, a type of two-dimensional bar code, that customers can use with merchants. “Instead of using Apple Pay or a credit card swipe or a PayPal button, it’s a personalized QR code that is connected to your payment platform. They’re launching that currently,” Bowers said.

“They’re also launching a redesigned digital wallet this year. That lets them become the payment wallet for many consumers,” Bowers said.

After growing 31% last year, PayPal earnings per share are expected to climb 22% this year, according to MarketSmith analysis.

Microsoft Is At Hub Of Digital Transformation

Microsoft is the poster child of the digital transformation, Bowers says. “Azure, their cloud business, Microsoft 365, the Office suite and gaming are big drivers,” Bowers said. “The coronavirus pandemic showed the value of what Microsoft brings. Their cloud services help businesses. They let people move to remote work sites. Microsoft is at the center of the global digital transformation.”

After climbing 21% last year, MarketSmith sees Microsoft EPS growing another 35% this year.

What Makes Growth Opportunities One Of The Best Mutual Funds

Growth Opportunities is a 2021 IBD Best Mutual Funds Awards winner. Its 2020 45.73% return more than doubled the 18.40% gain by the S&P 500. It topped the big-cap bogey in the three, five and 10 years ended Dec. 31 on an average annual return basis.

This year going into Thursday the fund is up 2.53% vs. 12.38% by the S&P 500 and 7.03% by its large-cap growth peers on average 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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