Kathleen McCarragher, co-manager of the fund, which is sub-advised by Jennison Associates, says the core approach of the fund is a research-driven, bottom-up, high-conviction portfolio that is benchmark-agnostic. The team also includes Sig Segalas, Blair Boyer and Natasha Kuhlkin.
When it comes to selecting companies, McCarragher explains: "Quite simply, we believe that companies that can create true economic value over the long term will generate superior growth and earnings and cash flows. Those will be the driver of excess returns over the long term. That's easier said than done, because growth does not persist for most companies at a high level for a long period of time."
The team is looking at a three- to five-year time horizon in which a company has a "competitive, proprietary advantage. It's usually something driven by secular change within industries in today's world," McCarragher says.
Today, that typically means technology-driven and structural changes that create growth. For example, digital innovation has been the largest source of change, she explains. It isn't just the "underpinnings" of running an organization, "but its move into strategic initiatives at the enterprise level: how to reach the customer, how to organize, understand and leverage the data being created in today's digital world and how to utilize those to drive future growth."
And if they like a stock, they'll hold it. For example, they purchased Tesla in 2013 and have continued to add and reduce the position as necessary. That stock, too, is an example of the intensive research the firm does: An analyst found Tesla through research into the battery industry.
"It leads to a portfolio that is diversified across industry, and diversified across what I call sources of growth or rates of growth," she says. So some industries might have 15% to 20% earnings growth. The portfolio typically has 55 to 60 holdings.
In 2020, the firm moved quickly — as early as February — once the pandemic became visible. They already held stocks that weren't vulnerable, such as health care, but they decided to sell others right away, such as aerospace and travel.
"Much of what we owned actually benefited by an acceleration in their demand," according to McCarragher.
That included ecommerce, e-entertainment and technology, so stocks they held such as Microsoft, Amazon and Costco did well. "We benefited by some of our existing positions in that digital transformation landscape, enterprise payments and on-demand consumption," she says.
The team was "surprised by the speed and depth, both down and up [of the market], and the magnitude and pace of the recovery, partly driven by the magnitude and pace of the decline." But she notes that part of the recovery was the government's fiscal and monetary response. "There could have been a very different outcome if it weren't for that," McCarragher explains.
She notes that the move toward value stocks in the fourth quarter of 2020 "really hasn't affected our view of the opportunity set in our portfolio or our companies. I would characterize it as any time you had a big reevaluation of growth, there tends to be a period of what I call 'back in and fillings' where those stocks need to grow into those valuations. So it's not a surprise they did well relative to the segment of the market that was significantly impaired by the shutdowns."
As the country moves toward reopening, she's not surprised to see growth stocks underperform, since "you've got a resurgence in operating profits in the more cyclical names in the market. But those recovery moves tend to be shorter-lived than the duration and opportunity we see in growth names," McCarragher explains.
