Alex Umansky is obliterating the S&P 500 over the last 5 years. His 8 high-quality stock picks for strong returns.

Alex Umansky

Baron Capital is synonymous with growth investing. Its founder, Ron Baron, is well-known for successfully betting on high-flying stocks like Tesla and Spotify. As of 2023, the firm has had 31 stocks return at least 1,000% throughout its four-decade history.

But believe it or not, amid its myriad of high-growth strategies, the blue-chip investment management firm has a more cautious product. It’s the Baron Durable Advantage Fund (BDAIX), overseen by one of the firm’s star managers, Alex Umansky. The strategy is focused less on stocks with huge upside and more on safer, mature companies. It’s “the closest thing we have to an all-weather fund,” Umansky told B-17.

“Baron Capital is a growth shop,” he continued. “This is probably one of the lowest-growth strategies we have.”

Don’t let that description fool you, however. Despite its more careful, lower-volatility approach, the Durable Advantage Fund is up 136% in the last half-decade, dwarfing the S&P 500’s 93% gain over that time. Year-to-date, the fund is also beating the S&P 500, returning 24.7%.

Umansky has a couple of parameters for which stocks get included in the fund. First, they have to be high-quality. For Umansky, that means the firms regularly generate returns on the capital they invest, their management teams are proven, they are industry leaders, and — as the name of the fund implies — they are well-positioned for the future thanks to their competitive advantages.

The second main component is valuation. Valuations need to be reasonable enough to expect solid returns going forward. Many of the stocks in the fund, like Nvidia, for example, weren’t added until they had pullbacks large enough to make them compelling, Umansky said.

When putting a stock in the fund, Umansky said he has so much confidence in the quality and advantages of the business that he intends to hold it forever.

B-17 asked Umansky about some of the holdings he’s particularly excited about — including some recent additions, and some that have resided in the fund for a few years now.

8 stocks Umansky is betting on

Umansky, who also manages the Baron Fifth Avenue Growth Fund (BFTHX), which is up 47% over the last 12 months, said that artificial intelligence is a pervading theme in many of his picks these days.

“Our research suggests that this is going to dramatically change the way people do business,” he said.

While Umansky said it’s too early to pick some of the winners in areas like software and services, there are clear winners emerging in hardware.

Broadcom (AVGO) and Taiwan Semiconductor (TSMC) are two examples, Umansky said. The semiconductor producers make up 4.1% and 4.3%, respectively, of the Baron Durable Advantage Fund.

“They do the plumbing, basically,” he said. “They sell the ammunition.”

Both of the firms have very strong balance sheets with free cash flow yields above 5%. Umansky said the two stocks were recent additions to the portfolio.

But there are some software-oriented firms whose revenues are already seeing a boost from AI, Umansky said.

Meta (META), Microsoft (MSFT), and Amazon (AMZN) are three included in his fund.

“Meta is already generating billions of dollars from artificial intelligence by being able to target better, by improving engagement, and by getting better click-through rates,” Umansky said.

“Amazon is one of the leaders in AI, and this will accelerate growth for their cloud computing,” he continued. “Microsoft has a partnership with OpenAI, and so they already have billions of dollars coming in from their copilot.”

The firms also have relatively low valuations, Umansky said. Meta’s 12-month forward price-to-earnings ratio is 23.5, while Microsoft’s is 32.6 and Amazon’s is 32.5. The three stocks are the largest holdings in the portfolio, with Microsoft taking the top billing at an 8.6% weighting.

Microsoft has long been a constituent of the fund, while Meta and Amazon were added during the bear-market pullback of 2022.

But the fund isn’t only AI-adjacent stocks. Umansky highlighted three financial services companies he likes, one being insurance firm Arch Capital (ACGL).

“Best-in-class management team, the best execution that we have seen in that space for probably 10 years,” he said. “That’s been a home run for us.”

The two others are Blackstone (BX) and Apollo Global Management (APO), both investment management companies.

Lower interest rates should benefit Blackstone because of its real-estate investments, Umansky said, and the bearish sentiment around the commercial real-estate space has the stock trading at an attractive valuation.

Growing interest in alternative investments like real-estate and private equity should boost Apollo, meanwhile. And Umansky is bullish on its leadership team.

“We think it’s an exceptionally well-managed business,” he said.

Apollo was recently added to the fund, while Blackstone and Arch have been in the fund for at least a couple of years.