Fund in Focus: TD U.S. Blue Chip Equity Fund

Multi-year FundGrade A+® Award winner

With growth stocks continuing to be the market favourites, it’s not surprising to see the TD U.S. Blue Chip Equity Fund posting above-average returns. For the first quarter of 2019, this growth-tilted fund has risen by 13.2%, handily outpacing the S&P 500, which is up 11.3%. Longer-term numbers are even more impressive, with a 5-year average annual compounded rate of return of 17.1% to March 31, compared with 15.2% for the index. Its consistent outperformance has earned it numerous FundGrade A+® Awards, most recently for 2018.

The portfolio is diversified yet focused. It holds just over 100 names, while the top 10 make up 46% of the portfolio. It’s exposure to the many of the so-called FAANG stocks (i.e., Facebook, Amazon, Apple, Netflix, and Google parent Alphabet) has certainly helped propel returns. At the end of March, its top holding, Amazon.com Inc., alone represented nearly 10% the portfolio. In fact, tech is the largest sector exposure at 35%, followed by consumer services at 19%, and healthcare at 17%.

Manager Larry Puglia uses a bottom-up, fundamental investment process that looks for companies with a history of generating free cash flow and a management team that has demonstrated ability for strong capital allocation. He looks for companies that can grow their cash flow even after covering necessary capital expenditures. Also, like other growth-focused managers, he likes companies that can compound earnings through self-sustained growth.

Puglia is also incredibly patient, with portfolio turnover averaging about 40% for the past five years compared with the 100% for other growth managers. He has reportedly held U.S. tech and health sciences firm Danaher Corp. (NYSE: DHR) for more than 24 years.

Top holdings at March 31 included Amazon.com Inc. (NASDAQ: AMZN), Microsoft Corp. (NASDAQ: MSFT), Facebook Inc. (NASDAQ: FB), Alphabet Inc. (NASDAQ: GOOG), and Boeing Co. (NYSE: BA).

Granted, valuations within the fund are extremely high, with the weighted average P/E listed at more than 24 times earnings, compared with 16 for the index. Other valuation metrics are similarly high. However, forward-looking growth rates are also higher, making the valuation levels a bit more palatable. Given the growth tilt, the fund is more volatile than the index or peer group.

Over the long-term, this is an excellent growth-focused U.S. equity offering, and I see no reason for that to change. However, I do have some concerns about the extremely high levels of valuation. While I expect the fund to run hotter than the market, it is now well ahead of the broader market, and a correction or period of below-average returns is to be expected. Unfortunately, we don’t know when that will occur. In the interim, further gains are possible.

If you have held this for a while, you will definitely want to take some profits and reduce your exposure.

TD U.S. Blue Chip Equity Fund
Fund company: TD Asset Management
Fund type: U.S. Equity
FundGrade Rating: A (March)
FundGrade A+ Awards: 2012, 2013, 2015, 2018
Style: Large-Cap Growth
Risk level: Medium to High
Load status: No-load/optional
RRSP/RRIF Suitability: Good
Manager: Larry Puglia since October 1996
MER: 2.41%
Fund Code: TDB977 (No-load units)
Minimum investment: $500

Dave Paterson, CFA, is a money manager and an expert on investment fund research and due diligence on a variety of investment products.

Notes and Disclaimer

Commissions, trailing commissions, management fees and expenses all may be associated with fund investments. Please read the simplified prospectus before investing. Mutual funds are not guaranteed and are not covered by the Canada Deposit Insurance Corporation or by any other government deposit insurer. There can be no assurances that the fund will be able to maintain its net asset value per security at a constant amount or that the full amount of your investment in the fund will be returned to you. Fund values change frequently and past performance may not be repeated. No guarantee of performance is made or implied. This article is for information purposes only and is not intended as personalized investment advice.