Top-performing U.S. large cap fund bets on interest rate hike

Top-performing U.S. large cap fund bets on interest rate hike

NEW YORK (Reuters) - The top-performing U.S. large cap growth fund for the year has prospered by betting on companies positioned to benefit should the Federal Reserve raise interest rates for the first time since the 2008 financial crisis.

Noah Blackstein, portfolio manager of the $74.1 million Scotia Dynamic U.S. Growth fund, said that a rate hike would "normalize" the equity markets and bolster the shares of companies in his portfolio like Tesla Motors Inc and that have been reinvesting in themselves.

"Higher rates in the bond market will get people who need income out of the equity market, and the equity market will start to reward businesses for growth and return on equity. It can't just be about paying dividends and buying back your own stock," Blackstein said.

Over the last three years, historically low yields of U.S. Treasuries and other bonds have prompted investors to move $13.6 billion into funds that focus on utilities, real estate and telecom companies that pay high dividends, according to Lipper data.

Those sectors have fallen this year, however, as investors price in the likelihood that the Federal Reserve will decide to raise rates at its meeting this week. Shares of utilities companies are down 10.3 percent for the year to date, while the SPDR Dow Jones real estate investment trust index is down 5.7 percent over the same timeframe.

Blackstein focuses on finding companies that can "sustain and expand their growth," he said. His largest positions are in cloud-computing companies such as Tableau Software Inc, Palo Alto Networks Inc, and Inc, a sector which he calls "undervalued" because standard accounting practices recognize costs upfront while subscription revenues trickle in, making price to earnings ratios seem high, he said.

His fund is up 14.1 percent for the year, the best performance among the 1,687 large-cap growth funds tracked by Morningstar and 16.6 percentage points better than the benchmark Standard & Poor's 500 index. Over the last five years, he has returned an average of 18 percent a year, which places him in the top 1 percent of funds in his category.

The fund owns no energy or industrial companies, a long-standing position based on Blackstein's believe that he cannot predict the future price of oil or other commodities.

He recently sold out of his position in Starbucks Corp because of concerns about its valuation amid its 39.8 percent rally for the year to date.

(Reporting by David Randall; Editing by Chizu Nomiyama)