This Fund Outperformed S&P 500 in the Last Decade, Now Its Manager Prefers These Stocks

The S&P 500's impressive 23% return last year was notable, but the Science & Technology Fund (PRSCX) from T. Rowe Price performed even better with a return of 40.3%. What's even more remarkable is that the fund has outperformed the S&P 500 over the past three, five, and ten years.

Investing in technology stocks represented by the magnificent 7 has been a solid choice. The fund holds shares in tech giants like Meta, Alphabet, Microsoft, Apple, and Nvidia.

Fund manager Anthony Wang attributes the fund's strong performance to artificial intelligence (AI) infrastructure and stocks like Nvidia, Broadcom, and Marvell, while also overweighting stocks like Meta and reducing exposure to software companies. I believe you must be on the right side of AI infrastructure, he said.

In the last quarter of 2024, some AI stocks reached a turning point at the application level, such as Palantir, which saw its stock price driven by government and commercial contracts. AppLovin also started integrating AI into its products, and the company saw its stock soar on Thursday due to better-than-expected earnings and an optimistic outlook. Wang holds both of these stocks.

Wang mentioned that the high concentration of technology stocks in the U.S. market is something to watch. The key is earnings and revenue growth. If these companies can continue to outperform the market, that is what matters the most. Over the past two years, they have indeed done so.

He pointed out that last year, these large tech companies contributed to more than 50% of the earnings growth of the S&P 500, but this may not happen again this year as these companies are increasing capital expenditures due to AI investments.

Although these tech giants remain in his portfolio, the fund has gradually broadened its investment scope since the end of last year.

If you look at my investment framework, earnings, growth, valuation, and company quality have always been the core considerations, he said. While the quality of companies remains high, valuations have become more demanding, and earnings growth is facing higher comparison bases.

I think now might be the time to take a more cautious approach to risk management. There's no need to take excessive risks for the last dollar of return. It should be more balanced, which is my current thinking direction.

Wang Suggests Shifting Focus from the 'Magnificent 7'

Anthony Wang suggests that investors look for other opportunities where corporate earnings are rebounding, such as industrial semiconductors in the chip industry or IT services companies that have underperformed. He has sold some strong-performing stocks and redirected funds into companies that are still in the early stages of profit growth or have room for valuation increases.

For instance, he sold online used car retailer Carvana, calling it a winner, and reduced holdings in credit rating company Fair Isaac, which performed well last year but had become overvalued.

Wang also noted that the investment thesis for Netflix has changed. Now, the market focus is no longer on the number of subscribers but on profitability. I think Netflix has a good outlook and a good story. Netflix, once part of the FAANG group before the rise of the Magnificent 7, could see a resurgence of its former glory.

Wang also increased his position in Visa, stating that its valuation is more attractive than Apple's. Consumer conditions are improving, and Visa's transaction volume is growing, so I think its outlook is quite strong.

Additionally, he has been buying Robinhood because the company launched a new trading platform and could benefit from relaxed cryptocurrency regulations. Robinhood is the gateway for many millennials and younger people to start their financial careers, so I'm optimistic about its future.