Deep Dive: This aggressive stock fund has had a wild ride — but it has beaten rivals and the S&P 500

Rebecca Irwin co-manages the fund
PRJAX,
-0.42%
with Mark Baribeau and Thomas Davis. She joined the management team early this year, having previously focused on managing large-cap U.S. portfolios at Jennison Associates, which she joined in 2006. PGIM Investments and Jennison are subsidiaries of Prudential Financial Inc.
PRU,
-0.16%.

In an interview, Irwin discussed the fund’s concentrated strategy and last year’s volatility.

Even with such a strong rally this year, some investors may still feel singed by last year’s tech plunge. A small number of companies have had a heavy influence on stock indexes that are weighted by market capitalization. For example, the SPDR S&P 500 ETF Trust
SPY,
-0.29%,
which tracks the S&P 500
SPX,
-0.27%,
is 24% concentrated in five companies: Apple Inc.
AAPL,
-0.43%,
Microsoft Corp.
MSFT,
+0.13%,
Amazon.com Inc.
AMZN,
-1.49%,
Nvidia Corp.
NVDA,
-0.48%
and Alphabet Inc.
GOOGL,
-0.88%

GOOG,
-0.92%.

The PGIM Jennison Global Opportunities Fund can invest anywhere, but its portfolio was 57% concentrated in the U.S. as of June 30, with 96% in the U.S., Western Europe and Japan. The fund is ranked four stars (out of five) within Morningstar’s “Global Large-Stock Growth” category. Its five-year total return is in the seventh percentile among 271 funds for that period.

Irwin said she and her colleagues use a “bottom-up” approach to identify companies with products or services “that will disrupt an industry or lead to a structural shift.” These shifts can be “driven by a proprietary technology, patent protection, network effects, speed to market, supply-chain advantages or economies of scale,” she said. The fund’s largest holding is Nvidia, which made up 8.5% of its portfolio as of June 30.

The fund’s geographic concentration reflects its stock selection and is not a result of any allocation policy, she said.

At this point we have to consider the term “disruptive innovation,” which became a popular one during the bull market for technology stocks through 2021 and was repeatedly cited by Cathie Wood, who manages the Ark Innovation ETF
ARKK,
-1.98%.

ARKK had a 153% total return during 2020 but fell during 2021 as some of its holdings that had fared so well as consumer behavior changed during the early part of the COVID-19 pandemic came back down to earth. ARKK fell much further in 2022, during the broad stock-market decline as interest rates shot up.

Two charts show the effect of higher volatility tied to strategies focusing on companies considered to be disrupters. First, here are total returns (net of fees for the funds), for five years through July 31, for the PGIM Jennison Global Opportunities Fund’s Class A shares, ARKK, the MSCI All Country World Index in U.S. dollars and the S&P 500:

For five years, the PGIM Jennison Global Opportunities Fund has been well ahead of its benchmark, the MSCI All Countries World Index (in U.S. dollars), but has trailed the S&P 500 slightly.

But a 10-year chart (leaving out ARKK, which was established in 2014) shows the fund outperforming both indexes:

Irwin said that valuations for growth stocks were high at the end of 2021, and that the Federal Reserve’s cycle of raising interest rates helped lead to “question marks about the sustainability of growth for companies that had benefited from the pandemic.”

Following the 2022 declines, she said the setup into 2023 was “more normalized.”

She also said that she and her colleagues “do not change our style for a specific market.” Long-term, she said, “we come out of those moments well-positioned.”

When asked for an example of a company whose growth she remains confident in, Irwin named MercadoLibre Inc.
MELI,
-2.23%,
which is based in Montevideo, Uruguay, and is the leading online retailer in Latin America. The stock nearly tripled during 2020, then fell 20% in 2021 and another 37% last year. So far in 2023, MercadoLibre’s shares have risen 46%. For five years through July 31, the stock is up 258%, underlining the importance of being patient.

Irwin said she and colleagues had spent a lot of time analyzing MercadoLibre’s markets, its financial health and its “competitive moats.” She expects the company to remain a long-term holding of the fund because online retailing has only penetrated less than 10% of the total retail shopping market in Latin America. She sees a long runway for growth.

One way to show what investors expect to see in terms of growth is to look at consensus estimates among analysts working for brokerage firms.

Here are the 10 largest holdings, out of 38, of the PGIM Jennison Global Opportunities Fund as of June 30, with projected compound annual growth rates (CAGR) for sales and earnings per share for two years through calendar 2025, based on consensus estimates among analysts polled by FactSet:

Click on the tickers for more about each company, fund or index.

Click here for Tomi Kilgore’s detailed guide to the wealth of information available for free on the MarketWatch quote page.

We used calendar-year estimates because some companies’ fiscal years don’t match the calendar. This approach of starting with calendar 2023 as a baseline bakes in the 50% sequential increase in sales that Nvidia expects to report for the second quarter of its fiscal 2024, which ended on Monday. Nvidia is scheduled to announce its quarterly results on Aug. 23.

Irwin said the bottom-up approach used to select stocks for the fund “can lead in any direction.” It leads to a concentration in U.S. technology stocks, she said, but also “Europe for consumer-discretionary companies.”

“The structure of the luxury industry lends itself to producing really good long-term compounding stocks. That is a compelling industry to invest in,” she added. Ferrari NV
RACE,
-1.72%
and LVMH Moet Hennessy Louis Vuitton SE
MC,
-0.34%
are among the fund’s top 10 holdings.

Not all of these companies are expected to achieve double-digit annual sales growth rates. However, all except Hermes International SCA
RMS,
+0.12%
are expected to increase earnings per share more quickly than they increase sales.

Nvidia’s stock has more than tripled this year and trades at lofty valuations of 47.6 times the consensus earnings-per-share estimate for the next 12 months and at a forward price-to-sales estimate of 22.4. In comparison, the S&P 500 trades at a forward P/E of 19.7 and price-to-sales ratio of 2.5.

But Nvidia is expected to grow its sales at a CAGR of 28.8% from a calendar 2023 baseline through 2025 and to increase its EPS at a CAGR of 36%. Those CAGR expectations are 5% for sales and 12.2% for EPS for the S&P 500.

And Irwin is looking far beyond two years for Nvidia. “We don’t think the market has properly discounted Nvidia for its growth. Our expectation for Nvidia’s earnings are significantly higher than the market’s expectation,” she said.

When asked about Nvidia’s expectation for its sales to increase 50% quarter over quarter, Irwin said, “I don’t think I have ever seen anything like that. It was stunning.”

She continued: “Right now there is about a trillion dollars’ worth of data-center infrastructure that is CPU-based, which is an older type of chip. Nvidia makes [graphics processing units], which are what is required to operate [artificial intelligence]. So that trillion of installed data-center infrastructure is going to have to transition to GPU,” she noted.

“Nvidia is better at doing this than anyone else,” Irwin added.

Another holding of the fund (but outside the top 10) is Tesla Inc.
TSLA,
-2.38%.
Irwin remains enthusiastic about the company. Tesla’s expected sales CAGR from 2023 through 2025 is 27.6% and its projected EPS CAGR is 37.5%, based on consensus estimates among analysts polled by FactSet

“We follow the consumer,” Irwin said, adding that Tesla continues to dominate the electric-vehicle space. During the first quarter, Tesla’s Model Y was the bestselling care of any type in the world, according to data from Jato Dynamics published by Motor1.

When asked about her experience as a money manager — an industry that has been historically dominated by men — Irwin called her 17 years at Jennison “wonderful.”

“I have been lucky to have good mentors, male and female, with great colleagues at my level, men and women. We have been able to share experiences and grow together,” she said.

Irwin said that the financial-services industry “continues to be more challenging for women.” But she added: “I am an optimist. To be a growth investor, you have to be an optimist. I feel very lucky to be in a place that is so supportive.”

Irwin has a law degree from Harvard University. Before joining Jennison, she worked as a healthcare-industry analyst for several other firms.

“I am happy to have the training as a lawyer,” she said. “It taught me to think critically and analytically. It continues to serve me well today.”

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