Download Report

View from Edgewood
1Q 2015 COMMENTARY
The longest running guessing game in recent financial history may actually have an answer soon. Most likely this year, probably
in the second half of the year, the Federal Reserve will end the zero interest rate policy (the ZIRP) that has been in effect since
the end of 2007. The increase will be of a large magnitude (moving up from zero will look dramatic on a percentage basis) but
will probably only go to .5%. At that point the Fed will wait a little while, probably one meeting, to see if this large percentage
increase up to a very modest level of interest rates sets off tremors in the financial markets and the domestic and international
economies. We believe that with the weakness in other economies, the strength of the dollar, which holds down inflation and
takes a nip out of GDP growth, and the continuing effects of the decline in oil prices, the Fed will not raise rates much through
the middle of 2016. Another severe winter in the eastern United States will probably produce some weak economic results in the
first quarter of 2015. We also feel that a move from an abnormal interest rate of 0% to some higher rate is a return to normalcy
to be welcomed.
The decline in oil price was so rapid over the last six months that it produced a fair amount of volatility in the financial markets,
where it is a mixed blessing. In the real economy the decline is mostly a positive in its effects on inflation and consumer spending.
In the financial economy there are negative effects from the declining profits in the energy sector to worries that the junk bonds
issued by smaller energy companies may end up in default. We are not going to predict where the price of oil will be in the next
six months except to say we do not expect it to go back to $100 per barrel.
Despite increased volatility in the equity markets the Edgewood Large Cap Growth composite posted a return of 1.9% net of fees
in the first quarter as compared to a 1.0% return from the S&P 500 Index and 3.8% from the Russell 1000 Growth Index. We feel
that this year may still deliver positive equity returns, but they will face stiffer headwinds as the market speculates on, and then
adjusts to, a Fed tightening.
The issue for the upcoming first quarter earnings season will be the stronger dollar. It has appreciated significantly versus the
euro over the past 12 months. This will have a meaningful effect on multinationals and any company with overseas revenue
exposure. Clearly the stronger dollar has caused companies to adjust their 2015 year EPS estimates. However, as long as unit
volume growth remains healthy, we expect the market to look through the one-time dislocation. We saw this with Nike’s recently
announced past quarterly results as investors bid up the stock despite mildly softer headline numbers.
In the first quarter of 2015 we sold FMC Technologies, a leading company in undersea drilling technology. It is a well-run
company with excellent technology, but any firm exposed to energy prices is due for a hard slog in the face of the commodity’s
fifty percent decline in the last nine months. The proceeds were invested in Priceline.com, a name some of our clients may recall
having owned once before. The stock had sold-off as Priceline is expected to feel the effects of the stronger dollar through lower
earnings translation as a large part of the company’s bookings are in Europe. However, our analysis leads us to believe that the
rise in the dollar versus the euro will drive an increased volume in local European bookings. This will also be boosted by a likely
pick-up in travel from the US and (dollar linked) Asian consumers to Europe. On top of all this, the company continues to gain
market share in online travel.
We remain guardedly optimistic about US stocks in general, but more specifically for the prospects of high-quality growth
stocks. The companies in your portfolio should grow at substantially faster rates than those in the S&P 500 Index, which will
hopefully translate to superior performance.
The specific securities identified and described do not represent all of the securities purchased, sold, or recommended for advisory clients, and the reader should not assume
that investments in the securities identified were or will be profitable.
EDGEWOOD LARGE CAP GROWTH EQUITY / 1Q 2015 / EDGEWOOD.COM1
Edgewood Large Cap Growth Equity
1Q 2015
INVESTMENT APPROACH
Our goal at Edgewood Management is to deliver
clients sustainable long-term performance by
investing in companies Edgewood considers to be
high-quality growth companies.
FIRM OVERVIEW
Founded1974
Employees33
Total Assets
$11.4 Billion (as of 3/31/2015)
Ownership
100% Employee Owned
Investment Strategy
Large Cap Growth Equity
Separate Account
$5 Million Minimum*
*Please refer to Edgewood’s Form ADV Part 2A and 2B Brochure
regarding account minimums.
PORTFOLIO MANAGEMENT
ALAN W. BREED
President & Portfolio Manager
Years of Experience.......................................................................................................................................................... 31yrs
LAWRENCE G. CREEL
Partner & Portfolio Manager
Years of Experience...........................................................................................................................................................29yrs
ALEXANDER M. FARMAN-FARMAIAN
Partner, Vice Chairman & Portfolio Manager
Years of Experience...........................................................................................................................................................27yrs
PETER JENNISON
Partner & Portfolio Manager
Years of Experience...........................................................................................................................................................28yrs
KEVIN R. SETH
Partner & Portfolio Manager
Years of Experience...........................................................................................................................................................30yrs
NICHOLAS A. STEPHENS, CFA
Partner & Portfolio Manager
Years of Experience...........................................................................................................................................................30yrs
Edgewood’s Large Cap Growth Equity strategy pursues long-term
capital growth through a portfolio of 22 stocks of large-sized
companies that are distinguished by their financial strength,
levels of profitability, strong management, and an ability to deliver
long-term earnings power. We purchase companies that trade at
discounts to their fair value and believe that, over time, the stock
prices of high-quality companies will rise to reflect the true value of
the underlying company. The Large Cap Growth Equity strategy’s
performance is typically benchmarked against the S&P 500 index
over a full-market cycle.
INVESTMENT PROCESS HIGHLIGHTS
Edgewood’s Large Cap Growth Equity strategy pursues a
bottom-up investment process to construct a portfolio of U.S.
large-cap growth companies. The investment team looks for
potential investments across the economy where it can find
growth irrespective of the sector or industry.
Edgewood’s
distinct areas:
investment
process
focuses
on
two
Stock Selection – The team’s investment process begins
by identifying companies that are distinguished by
their financial strength, levels of profitability, strong
management, and an ability to deliver long-term
earnings power. The team searches for companies
that are well positioned for long-term growth, driven by demand
for their products and services, trading at discounts to their fair
value, and are at an early stage in their profit cycle to benefit from
the increased cash flows produced by the profit cycle.
Capital Allocation – Based on the investment team’s
fundamental analysis of a company’s profit cycle and
using a five-year discount to present value model,
portfolio holdings evolve through three phases: Phase
One investments are in the early part of their profit cycle
and will warrant a more sizeable weighting once their
profit cycle begins to grow; Phase Two investments are
companies that are being increased to a larger weighting
due to the relative attractiveness of their valuation which
are moving through the strongest part of their profit
cycle; and Phase Three investments are companies that
are being reduced to a lesser weighting because they are
nearing the team’s estimate of full valuation or their profit
cycle has begun to deteriorate.
EDGEWOOD LARGE CAP GROWTH EQUITY / 1Q 2015 / EDGEWOOD.COM2
1Q 2015
PORTFOLIO CHARACTERISTICS AS OF 3/31/2015*
EDGEWOOD
S&P 500
Weighted Market Cap
$103bn $133bn
(Billions)
SECTOR DIVERSIFICATION AS OF 3/31/2015*
COMMENTS
Focused on Growth
o
Financials
15.2%
Number of Holdings
22**
500
Concentrated Portfolio
o
Technology
12.9
o
Internet
11.1
EPS Growth
43%
45%
(5 Years Historical)
Focused on Earnings Growth
o
Healthcare10.3
o
Medical Technology
Sales Growth
21%
7%
(3 Years Historical)
Focused on
Earnings Growth
o
Biotechnology7.3
o
Information Tech.
6.6
o
Industrials
6.6
o
Business Services
6.5
o
Consumer Disc.
6.2
o
Wireless
4.5
o
Media & advertising
3.4
o
Cash
1.2
LT EPS Growth***
18%
11%
Earnings Outlook
*All portfolio characteristics produced by Bloomberg, rounded to the nearest
percentage
**Includes both Class A and Class C of Google
***Bloomberg estimate
8.2
TEN LARGEST HOLDINGS AS OF 3/31/2015*
Amazon.com Inc.
Cognizant Technology Solutions
American Tower Corp.
Gilead Sciences, Inc.
Arm Holdings Plc.+
Google Inc.**
Celgene Corp.
Illumina Inc.
Charles Schwab Corp.
*Sectors defined by Edgewood’s Investment Committee and are rounded to
the nearest tenth.
NET COMPOSITE RETURNS (%) AS OF 3/31/2015
Visa Inc.
*The specific securities identified and described do not represent all of the
securities purchased, sold, or recommended for advisory clients, and the
reader should not assume that investments in the securities identified
were or will be profitable.
**Both Class A and Class C shares.
+Sponsored ADR
25
20
17.5
16.7
16.1
17.1
14.5
15
12.7
10.7
MARKET CAP DISTRIBUTION AS OF 3/31/2015*
MARKET CAP (IN BILLIONS)
EDGEWOOD (%)**
10
COMPANIES (#)
Less than $20
17%
5
$20-$40
34
7
$40-$75
6
2
$75-$125
14
3
$125+
27
5
**For the equity portion of the portfolio
*Rounded to the nearest percentage
8.0
5
0
1 Year
3 Year
5 Year
Edgewood Large Cap Growth Composite
10 Year
S&P 500 (TR)
Performance is rounded to the nearest tenth. Returns are net of management
fees. Returns shown here are annualized. Past performance does not guarantee
future results.
EDGEWOOD LARGE CAP GROWTH EQUITY / 1Q 2015 / EDGEWOOD.COM3
Edgewood Large Cap Growth Equity
1Q 2015
Edgewood Management LLC Disclosures - 1Q 2015
The specific securities identified and described do not represent all of the securities purchased, sold, or recommended for advisory clients, and the
reader should not assume that investments in the securities identified were or will be profitable.
EDGEWOOD MANAGEMENT LLC: LARGE CAP GROWTH COMPOSITE (Ending March 31, 2015)
1 YEAR Edgewood Large Cap Growth Composite
16.69%
17.52%
17.07%
S&P 500 (TR) Index
12.73%
16.11%
14.47%
Russell 1000 Growth Index
16.09%
16.34%
15.63%
Note: Returns are shown in U.S. dollars. Composite returns are net of fees. 3 YEAR ANNUALIZED
5 YEAR ANNUALIZED
Edgewood Management LLC is a registered investment adviser specializing in growth oriented investment management. The Edgewood Large
Cap Growth Composite is comprised of individual and institutional accounts that invest in Edgewood’s portfolio of 22 large capitalization growth
companies chosen by using fundamental analysis and an internal valuation discipline. The composite returns are benchmarked to the Standard
& Poor’s 500 Index (“S&P 500”) and the Russell 1000 Growth Index (“R1000 Growth”). The S&P 500 is an unmanaged index with no expenses
which covers 500 industrial, utility, transportation and financial companies of US markets. It is a capitalization-weighted index calculated on a
total return basis with dividends reinvested. The R1000 Growth measures the performance of those Russell 1000 companies with higher priceto-book ratios and higher forecasted growth rates and dividends are reinvested.
Edgewood Management LLC claims compliance with the Global Investment Performance Standards (GIPS®). To receive a list of composite
descriptions of Edgewood Management LLC and/or a presentation that complies with the GIPS starndards, contact Kitty McBride at 212652-9100, or write to Edgewood Management LLC, 535 Madison Avenue, 15th Fl., New York, NY 10022 or [email protected].
CONTACT US
JIM CARRIER
[email protected] / 212.652.9123
535 MADISON AVENUE / 15TH FL / NEW YORK, NY 10022
EDGEWOOD.COM / 212.652.9100