Institutional Strategies

Large Cap Growth - Concentrated

The strategy utilizes the same investment approach as the firm’s more diversified Large Cap Growth strategy, but adds an additional step to filter only the best long term ideas. The result is a more concentrated strategy approach consisting of only the highest conviction Large Cap Growth stocks.

The Large Cap Growth investment philosophy is centered on the following beliefs:

Generic growth stock investing is inherently challenging

  • Failure rate of growth companies is very high
  • Risk is often underestimated
  • Most growth investors overpay for short-term earnings growth and underpay for enduring, structural earnings power

Significant, long-term excess returns can potentially be achieved by:

  • Focusing on a smaller subset of unique business franchises, which typically increases the odds for success
  • Having a mindset geared to methodically avoiding common mistakes by emphasizing franchise power and earnings sustainability over earnings growth rates

The stock selection process is based primarily on fundamental research, but does use some quantitative analysis during the screening process. From a quantitative standpoint, the team concentrates on profitability, capital intensity, cash flow and valuation measures, and earnings growth rates. Once the quantitative research is completed the team turns to the internal research department for validation of the initial findings. Key to the fundamental research effort is identifying companies that they believe possess a sustainable competitive advantage, which should enable them to generate superior levels of profitability and growth for an extended period of time. Special focus is given to those companies that appear well-positioned to benefit from secular trends embedded in the marketplace (i.e., demographics, deregulation, capital spending trends, etc.).

The investment process consists of a disciplined 4-step process:

Screening for inclusion in the “Franchise Growth Universe”

The process starts with a quantitative screen that reduces the investable universe of the 1,500 largest U.S. companies down to 200-300. Companies with a market cap of at least $3 billion, and generally above $8 billion are filtered according to the strength of their earnings growth and a profitability matrix. This matrix, an essential part of the team’s analysis, includes measures such as gross margin, operating margin, net margin, return on equity, and/or return on assets.

Franchise Growth Universe – Evaluation of sustainable competitive advantage

The next step consists of identifying the sustainable growth drivers that support the high levels of profitability displayed by this reduced list of 200-300 companies. These generally consist of strong brand equity, proprietary technology, high switching costs, greater access to distribution channels, larger economies of scale, and/or stronger network effects.

Building the Franchise Growth Portfolio

The next step consists of building a portfolio of 40-60 companies that have the appropriate catalysts such as a superior business model (structural advantages producing superior returns) and also attractive industry characteristics (having barriers to entry, large market opportunities and secular unit growth). The selection of these stocks is based on criteria such as profitability, growth, capital discipline and valuation factors.

Building the Concentrated Growth Portfolio

In the final step the team selects what they feel are the best 25 long term ideas from the diversified 40-60 growth portfolio. The concentrated portfolio consists of only the companies the team feels are the most durable franchises with superior growth characteristics. Despite the limited number of stocks, the team seeks to minimize the risk of business model disruption by paying particular attention to not being over leveraged to a theme or sector.

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Key Features

Composite Performance History Since 1/1/2003
Benchmark Russell 1000 Growth Index
Style Fundamental, Growth
Target Alpha 200-300 bps above Index
Over full market cycles (3-5 years)
Peer Universe U.S. Large Cap Growth Equity
Typical Tracking Error 600-1000 bps
Holdings Range < 25
Max Position Size 15%
Sectors 0-2x Index weights
Proprietary Growth Spectrum Diversification across three proprietary buckets: Accelerating, Controlled and Cyclical
Investment Vehicles Institutional Separate Account