Large Cap Growth - Concentrated

For the Period Ending: 9/30/2018

Portfolio Manager:
Bradley M. Klapmeyer, CFA

Market Update

Third quarter performance for equities was strong, posting solid gains across all styles and capitalization ranges. Growth styles outperformed value styles, further widening the year-to-date outperformance of growth relative to value. Large cap styles outperformed both mid and small cap, as well as outperforming both on year-to-date basis. The market performance was driven by strong U.S. economic growth, which has been exceptionally strong during recent quarters. We view the domestic economy as temporarily benefiting from the fiscal stimulus impact on personal consumption (tax cuts) and export gains related to pull ahead from tariffs. The acceleration in U.S. growth compared favorably to softening growth prospects in Europe and emerging markets.

The trade war rhetoric softened with North American and European trading partners but intensified further versus China as the U.S moved forward with a third round of tariffs and alluded to future action. The Federal Reserve is likely watching these international trade disputes with interest but did move forward with another rate increase in September, continuing the steady climb higher in the fed funds rate. 10-year U.S. Treasury yields ended the quarter back at recent highs, but the short-end yields moved higher causing the yield curve to flatten slightly during the quarter.

Within our benchmark, the Russell 1000 Growth Index, momentum, growth and quality factors outperformed risk and value factors during the quarter, which has been the established trend all year. This likely indicates that investors have positioned for a deceleration in GDP growth from the rapid levels seen recently.

Portfolio Review

The portfolio modestly outperformed the benchmark return during the period, and has maintained strong relative and absolute outperformance year-to-date. Stock selection in Industrials and Information Technology benefited performance. Information Technology provided positive attribution. The portfolio also benefited from overweight exposure to two major credit card companies as well as from limited exposure to semiconductor and semiconductor capital equipment stocks, both of which were notably weak during the period.

Financials were a detractor from performance. Upside to the group was limited as interest rates had yet to break to new highs and market volatility. Oil services stocks were negatively impacted by constrained ability to move oil out of the Permian Basin, a key area of U.S. exploration, which required slowing of oil production in that region and idled equipment.

The more notable portfolio adjustments during the quarter include the sale of two holdings, although those reductions were initiated during the second quarter.


As mentioned, we believe the torrential pace of GDP growth in the U.S. is unlikely to continue, but economic data remains supportive of growth in the 2.5%-3.0% range. Inflationary pressures are a key watch item, but currently there appears to be only modest pressure. With that said, the market has seemingly concluded the environment is more late-cycle with expectations for increasing risk and volatility. We agree with this forecast and believe this outlook will constrain market valuations and steer investors to more durable, high-quality growers.

The trade war with China is still a material overhang and remains the most visible threat to markets. China’s economic growth is likely to slow because of the tariffs, which we think will also send ripples through many emerging market economies. As we have noted in prior commentary, globalization has been a source of incremental sales growth and profit margins for many U.S. companies. Building out an international supply chain, sourcing inputs (labor) from global markets and selling into those same markets have all provided a higher level of growth and profitability then would have been likely otherwise.

Many economists project limited first-order impacts from tariffs, but we believe clarity on trade rules is needed to sustain corporate and consumer confidence. Continued uncertainty about the duration of trade war rhetoric and depth of tariffs is likely to erode the strong business confidence and eventually spill over into business investment. We view as very possible a scenario in which business investment will pause during this trade dispute, causing negative revisions in many technology and manufacturing sectors.

In our portfolio we have been reducing the cyclical exposure in Information Technology and Industrials throughout the year and are now more comfortable with our bets in those sectors given the current global backdrop. Although we are careful not to overreact to specific macro events, we also want to make sure we aren’t betting on factors that are uncontrollable by the companies in which we invest. Where possible, we want to avoid predicting the outcome binary macro events, preferring to maintain a focus on the long-term success of a company’s business model.

As the trade war has escalated, investors have transitioned into more U.S.-focused securities, higher quality and more profitable names. If the trade war escalates further, with detrimental impacts on global growth, then sectors and industries considered more defensive, e.g. Consumer Staples and pharmaceuticals, would be a potential hiding spot for investors. This may lead to temporary gains for defensive areas in the market, but they remain largely unattractive to us because of limited growth prospects due to secular pressures, particularly within Consumer Staples.

We remain overweight Information Technology due to solid long-term growth prospects and favorable business models, but we remain watchful of valuations and decelerating growth. We are materially underweight the new Communication Services sector. As always, we are comfortable maintaining sector differences with our benchmark provided that a company and its stock fit the core tenets of our philosophy and process.

The opinions expressed are those of the portfolio manager(s) and are not meant as investment advice or to predict or project the future performance of any investment product. The opinions are current through September 30, 2018 and are subject to change due to market conditions or other factors. Any mention of investment performance refers to gross-of-fees performance, unless otherwise noted.
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Investment Team

Bradley M. Klapmeyer, CFA

Senior Vice President, Portfolio Manager

Mr. Klapmeyer is portfolio manager of the firm’s Large Cap Growth investment strategy, appointed to this role in 2016. He has been a member of the Large Cap Growth team since 2011. He was appointed portfolio manager of the firm’s Tax-Managed Equity mutual funds in 2014. He held equity investment analyst research responsibilities prior to his appointment as co-portfolio manager, covering large cap growth securities and the biotechnology industry.

Prior to joining the organization in 2007 as an equity investment analyst, Mr. Klapmeyer held equity analyst positions with Prudential Equity Group, LLC from 2006 to 2007 and with Commerce Bank from 2000 to 2006.

Mr. Klapmeyer earned a BS in Finance from Truman State University.

Gage T. Krieger, CFA

Assistant Vice President, Assistant Portfolio Manager

Mr. Krieger is assistant portfolio manager of the firm’s Large Cap Growth investment strategy and assists the portfolio manager in idea generation, research, portfolio construction, and risk management efforts. He has been a member of the Large Cap Growth team since 2016. He is also a member of the firm’s equity research team, covering industries in the health care sector.

Prior to joining the organization in 2012 as an equity investment analyst, Mr. Krieger was a senior associate, equity research covering the telecommunications services sector for Citi Investment Research from 2009 to 2012. Prior to his role at Citi Investment Research in New York, Mr. Krieger was an associate, middle market equity sales for Citigroup Global Markets in Denver, CO from 2006 to 2009.

Mr. Krieger earned an MBA from Rockhurst University and a BSBA; concentration in Finance from Colorado State University.

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