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ADAM SHELL

'This Feels Different To Me,' Says Award-Winning Fund Manager

Just as pro football teams build success on the field around star franchise players, Invesco's Ron Zibelli constructs his top mutual fund around marquee stocks.

Zibelli, senior portfolio manager of Invesco American Franchise Fund (VAFIX), fills his portfolio with U.S. stocks that are stars in the sectors of the economy they do business in. "We're looking for companies that stand out," Zibelli told IBD.

Top Mutual Fund Stands Out

Invesco American Franchise Fund is a 2025 IBD Best Mutual Fund Awards winner. That means it beat the S&P 500 in the past one, three, five and 10 years ending Dec. 31, 2024.

So far this year, this top mutual fund is up 14.14% through Sept. 26, topping the S&P 500's 13.98% gain, according to fund tracker Morningstar. And over the past 10 years the fund's 16.18% annualized total return is a full percentage point better than the S&P 500's 15.12% gain.

IBD caught up with Zibelli, who also serves as Invesco's chief investment officer of growth equities, to learn more about his investing style.

IBD: How do you define a franchise, or star, stock?

Ron Zibelli: The fund's name does imply a lot about what we're looking for. We're seeking to identify and get to know companies that can generate durable, above-average growth so that we can capture the powerful benefit of compounding.

IBD: You're not looking for one-hit wonders, are you?

Zibelli: There's a relatively small number of companies that emerge from the pack and generate fantastic returns over long periods of time. And those are really the difference makers.

Winning Traits Top Mutual Fund Looks For

IBD: What are key traits of difference makers?

Zibelli: These companies tend to be run by accomplished management teams that have demonstrated the ability to execute on a business plan. They tend to have leading market positions, or a superior product or business model that gives them durable advantage. Oftentimes, they're really transcending what's going on in their sector of the economy.

IBD: The fund seeks "unrecognized, underappreciated" names but you own all the Magnificent Seven. Explain.

Zibelli: I find that the biggest misperception about the stock market's greatest winners has to do with sustainability. So, the stock goes up. It gets a lot of attention. People point (to negatives).

IBD: So, what are they missing?

Zibelli: They underestimate the future compounding that's still yet to occur. There's just a lack of understanding that certain companies have characteristics where that above-average growth is durable. And it's going to keep going, and it's going to keep compounding.

IBD: Are you saying the best stocks are ones you buy and hold?

Zibelli: The mistake many investors make is that they sell too soon and, therefore, they give up on that tremendous long-term compounding benefit that comes with staying with the greatest winners.

Big Bets On Big Stocks

IBD: So, that's why you own Nvidia, Microsoft, Amazon, Meta Platforms, Apple, Netflix and Alphabet?

Zibelli: We don't claim to have some information edge on the very largest companies. We think about the portfolio in two pieces: our top 10 holdings and everything else.

IBD: Every name matters, right?

Zibelli: With the top 10, we're going to have less of an advantage in information because those are so well followed and so aggressively researched. But we do have a view on each one and do add value. But as you go down the market-cap scale into the midcap range, that's where we can add even more value and can really differentiate with our research.

IBD: How do you add value?

Zibelli: It's not always about a single company. We identify patterns and trends in the economy that have the wind at their back and groups of companies that are better benefiting from trends driving outsize growth. We position the portfolio in themes.

Top Mutual Fund Finds Moneymaking Themes

IBD: What themes do you like now?

Zibelli: We have a couple of themes right now in our portfolios, where we see that extra impetus of growth. That obviously includes artificial intelligence (AI). But it also includes what we see as an industrial renaissance in the United States. And a big cyclical upturn in capital markets-oriented companies, as both merger and acquisition activity and IPOs emerge from a recessionary stretch over the past two years.

IBD: Your fact sheet says your research focuses on objective information. What does that mean?

Zibelli: We narrow it down to the critical few drivers that determine the outcome for each security. We look at the correlations of key performance indicators (KPIs) with stock price performance. We hone in on certain metrics that we think are most important for each company's stock. We're not trying to ingest all information about every company. There's so much. It's about what you do with it and what you focus on that really matters. The mistake is trying to ingest too much information. You just get overloaded.

IBD: Why are you high on AI stocks like your No. 1 holding Nvidia?

Zibelli: It speaks to the themes I referenced. Two and a half years ago, (Nvidia CEO) Jensen Huang kicked off the artificial intelligence revolution. Nvidia announced a tremendously strong quarter in the spring of 2023, and Huang said this is a starting gun going off on AI.

AI Is Just Getting Started

IBD: That got your attention?

Zibelli: We dropped everything as a team. We put AI at the top of our list, and said we're going to research the entire ecosystem of opportunity presented by this revolution. And we ended up populating our portfolios with a range of companies in different sectors of the economy that would be participating in this artificial intelligence revolution, primarily around building the infrastructure. And the buildout is still going on today, two-and-a-half years later.

IBD: Are a lot of your holdings connected to AI?

Zibelli: We hold companies in the industrial sector, the energy sector, the utility sector, the technology sector, obviously, and in communication services that are all feeding into this ecosystem of opportunity around AI.

IBD: What is the thesis for this notion of a U.S. industrial renaissance?

Zibelli: It's a combination of things stimulated by federal investment, reduced regulations and innovation. There's a tremendous amount of fiscal stimulus that's encouraging domestic investment.

Tailwinds Lift Other Areas For Top Mutual Fund

IBD: Are there other sectors benefiting from tailwinds?

Zibelli: Technology driven innovation has created a strong demand impetus across a range of industrial brands and companies, including the commercial aerospace industry as well as increased demand from the defense establishment.

IBD: You're also bullish on capital markets companies. Why?

Zibelli: Really, post-Covid, we've been in a bit of a depression when it comes to acquisition activity and initial public offering (IPO) activity on Wall Street. We've been in an environment where companies were staying private longer and policies of (the prior White House administration) deterred folks from considering business combinations.

IBD: What changed — the more business-friendly government policies?

Zibelli: What we're seeing right now on both fronts is an inflection in growth and an opening of the window, so to speak. You're seeing a big pickup in merger-and-acquisition (M&A) activity on the order of, say, 30% increase this year. And IPOs are really starting to come into the mix again. So, we think the capital market-oriented companies are going to enjoy a significant cyclical rebound here. And, of course, a number of those companies also participate in the asset management business, which is benefiting from increased market values.

Know When To Sell

IBD: What's your sell strategy?

Zibelli: We're always thinking about the relative growth prospects of companies. We have a robust opportunity set in today's economy. There are a lot of growth stocks that are thriving. So, companies that are not living up to our expectations, whether it's on those key performance indicators that we focus on, or just not meeting our expectations (are sell possibilities). We're pretty strict about having a sell discipline. We will upgrade the portfolio. How? We will sell that security and go buy an alternative name that's usually in the same sector, but one we think has (a better outlook). We have limited tolerance for disappointment. It's like that classic strategy: sell your losers quickly and let your winners run. That's our philosophy.

IBD: There's been increasing talk of a bubble. Do you buy into that narrative?

Zibelli: I've lived through bubbles. And this feels different to me. And the reason it does is because the fundamental support for the increase in values of companies is there. You can find big winners sprinkled around throughout the market. But the fundamentals are real. Revenue growth, cash flows, earnings, they're coming in strong. The latest quarterly profit reports for corporate America were great on both revenue and earnings, and cash flows. It's not hype. It's real numbers.

IBD: So, it's not a bubble?

Zibelli: Valuations are at the high end of historical averages, but they are supported by this sustained, strong fundamental backdrop. The resilient economy. Both fiscal and monetary support that you're getting in the markets. Plus, a tremendous wave of technology driven innovation. So, I don't think we're at bubble status as a result.

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