The No. 1 US stock picker of 2016 paid scant professional attention to the biggest event of the year, the presidential campaign that led to the election of Donald Trump. He focused instead on finding small companies with enough underappreciated strengths to prosper no matter who's in the White House or managing economic and interest-rate policy.
He is J. David Wagner, vice president at Baltimore-based T. Rowe Price Group and manager of the T. Rowe Price Small-Cap Value Fund. It returned 30 percent, more than double the Standard & Poor's 500 Index and better than the Russell 2000 Index or the S&P Midcap 400 Index. Among the 156 US non-indexed mutual funds with assets greater than $5 billion — making them accessible to institutions and individuals alike — Wagner's fund was No. 1, according to data compiled by Bloomberg.
Even in a good year for shares of small and mid-size companies, Wagner's fund stands out. Of the 44 funds investing only in small or mid-cap stocks, his was the best of 13 that beat a strongly performing benchmark.
Wagner's winning strategy depended on identifying companies too small for most analysts to acknowledge. Yet his fund avoided the price swings of competitors with a similar approach, giving it a volatility rating 10 percent lower than the average of its peers.
For the second consecutive year, the top stock picker is a practitioner of the valuation model introduced in the 1930s by Columbia University professors Benjamin Graham and David Dodd. The model considers earnings, dividends, cash flow and book value in pursuit of companies trading at less than their net worth. The 2015 winner, the Fidelity Select Retailing Portfolio, returned 19 percent that year among the 563 actively-managed equity mutual funds with a minimum of $1 billion and at least 80 percent invested in the US It easily beat its peers and vanquished the S&P 500's 2.2 percent advance last year. The same fund trailed the S&P 500 this year, however, returning 6 percent and demonstrating that one year's winning strategy can be another year's mediocre one.
Some of Wagner's largest gains were in health-care stocks, which enriched his investors despite representing the most underweighted industry in the fund at 6.2 percent compared to the 14 percent benchmark for similar funds. While the benchmark lost 6 percent, T. Rowe's health-care shares returned 22 percent, outperforming the benchmark by 28 percentage points, according to Bloomberg data. Among the winners: Lantheus Holdings Inc., the North Billerica, Massachusetts-based developer and manufacturer of diagnostic medical imaging agents with a market capitalization of only $305 million, appreciated 146 percent; WellCare Health Plans Inc., the Tampa, Florida-based managed care company, rose 76 percent; Lionville, Pennsylvania-based West Pharmaceutical Services Inc., which climbed 42 percent, and Allen, Texas-based Atrion Corp., the maker of medical products and diagnostic equipment, gained 33 percent.
Since the Affordable Care Act took broad effect in 2013, American health-care companies outperformed every US industry through July, 2016. "Health care has been on a fantastic tear since the ACA was passed, so it's been tougher and tougher for us to find stocks that look undervalued or cheap," Wagner said in an interview earlier this month. While health-care stocks don't look particularly cheap relative to those of financial or energy companies, T. Rowe increased its holding of Lantheus because "investors aren't focused on it and they don't demand a lot of attention from Wall Street analysts."
