Q: What is the history of the fund and your portfolio team?
We started the Focused Growth Opportunities strategy in 2007. Lew Piantedosi leads the growth strategy team at Eaton Vance and co-manages the Focused Growth Opportunities Fund with Yana Barton. Lew began working in the industry 22 years ago as a consumer and technology sector analyst, before becoming a portfolio manager.
Yana began her career with Eaton Vance 18 years ago and has focused on large cap growth for 12 years, with an emphasis on quantitative analytics and risk management oversight.
We believe the co-portfolio manager structure we employ sets us apart from our peers. Unlike many co-portfolio managers, our roles with the fund are unique and distinct.
Another differentiator is that we have very deep resources, with a high-caliber team supported by four seasoned traders along with 9 analysts dedicated to our growth strategies. On average, the team has 11 years industry experience covering their respective industries.
Q: What is your investment philosophy?
We focus on seeking out strong, secular growth trends. We are investors in companies, not traders of stock. We want to find companies that are benefiting from secular growth trends because they act as a tailwind to growth. Our objective is to beat the Russell 1000 Growth Index benchmark, on a risk adjusted basis. We measure that by using an information ratio over a full market cycle of five to seven years.
For us, risk management is a way of life. When you look at how this product and the portfolios perform, you see significant alpha generation with less risk and less standard deviation than a typical “focus fund” or concentrated high active share fund.
Q: Where do you look for opportunities?
Our focus is on individual companies and the inherent risks. We worry less about the economic cycle, emerging markets events, or the impact of oil prices as these issues are tough to predict and have less of an impact on companies that participate in secular growth. The stocks we invest in can trade on their own fundamental merits over time.
As long-term growth investors, we always look forward, not backward. We can’t buy a stock’s performance track record — that’s done, it’s in the past. What we can buy, however, is the stock’s potential to outperform in the months and years ahead. Therefore, we like to say our goal is to invest in tomorrow today.
We see large areas of opportunity in today’s market environment. We believe some of the most attractive opportunities are tied to several compelling secular growth trends – what we call “megatrends” – in the technology, health care and consumer sectors. While these trends are likely to persist over the coming years, they are not fully appreciated by investors. Over the long haul, strong, well-managed companies with exposure to these exciting areas appear likely to exhibit better-than-market growth and have greater prospects for capital appreciation.
Within the technology sector, there are several big picture trends that are developing. One is the shift of traditional global advertising away from traditional media such as TV, radio, and newsprint, toward digital advertising mediums, which is taking a larger share of the $650 billion global advertising market.
Our consumer analysts talk with the biggest consumer companies in the world on a regular basis. Those companies are putting more and more dollars towards online and digital advertising, especially in social media outlets, such as Facebook. Companies are moving to this model because of the significantly larger return on investment from digital advertising.
Simultaneously, the technology sector is delivering and increasingly relying on connected devices. This is a long-term, sustainable trend that investors can benefit from by investing in selective names within the semiconductor industry.
An enduring trend within the consumer sector is health and wellness. People are trying to eat healthier and be healthier in general, which is creating investment opportunities.
Q: How do you evaluate investment opportunities?
A company must meet a number of criteria before we will consider buying it. First, it has to be well-run. We like to meet with management and discuss its business strategy in detail.
As large-cap managers we look at more than 1,200 positions. We are purely large-cap focused so we define our universe as the stocks in the Russell 1000 Index plus 200 large-cap global operators.
Next, we dissect the financial statements and develop our own models. We want to determine how fast the company can grow its top line and its earnings, and whether or not it can expand its profit margins. Then we’ll look at the balance sheet and cash flow. All other things being equal, we like companies with strong balance sheets and the ability to self-finance. This helps trim that universe of 1,200 positions down to about 300 positions, which is what we call our active coverage.
The analyst team generates models, assesses the fair value of the company based on earnings analysis, meets with management teams, attends conferences, and assesses industry dynamics to help us determine the most appropriate investments for the Fund. Every analyst picks his or her best ideas based on the reward to risk assessment generated via their models, which results in 25 to 40 stock positions in the Focused Growth Opportunities strategy. These represent our highest conviction ideas.
If you look at the characteristics of our portfolios over the years, they have consistently shown better-than-market growth rates and below-market valuations. That is proof that we are holding true to our basic philosophy and process.
Q: What is your research process?
Based on fundamental research and risk management, our research process has been purposefully designed to identify public companies with the best combination of growth prospects and attractive valuations. It is a process that has been consistent through the years in its basic philosophy and methodology, although we are always trying to make improvements in terms of resources and tools.
We have a research team of analysts, who have vast experience across sectors and industries. They do bottom-up, fundamental research to find the best undiscovered, undervalued, or unrecognized growth opportunities available.
As part of our process, we spend a lot of time considering and managing the risk characteristics of the portfolios. We strive to manage unintended risks, and want the holdings to be conviction-weighted so that our highest active weights are in stocks that we believe offer the best risk/reward trade-off. We are risk-aware, not risk-averse. That’s an important distinction.
Q: What is your analytical framework?
We work with our analysts to create model income statements, balance sheets, and cash flow statements for the 18-24 months looking forward and construct three different scenarios, a base case, a bull case and a bear case. This helps us examine what could go right, and what could go wrong-- essentially the realities of any given company.
The three scenarios help us create a reward to risk opportunity. We follow this process for every stock we review to identify the 25-40 names that have the best opportunity.
We compare the base case, or most likely scenario, to the current consensus. Our analysts also create a bull case and a bear case for each stock. The bull case evaluates what could go right if everything lines up in the company’s favor. The bear case examines what happens in the event of an economic downturn or if another company enters the market and takes market share away from the company.
The three scenarios help us create a reward to risk opportunity. We do that with every single stock we cover to identify the names that have the best opportunity.
Q: How do you determine which companies to work with?
An important part of our bottom-up, fundamental research is meeting with management teams, visiting conferences, and talking to suppliers and competitors to get a thorough understanding of companies. We are focused on some of the most compelling secular growth trends, or “megatrends” in today’s market environment. We believe strong, well-managed companies with exposure to these trends will have greater long term success.
In technology, smarter connected devices are driving a wider range of applications, benefiting the semiconductor industry. In health care, it’s partly about demographics. An aging population worldwide bodes well for the sector, particularly pharmaceuticals consumption and drug development. Big challenges such as Alzheimer’s, cancer and multiple sclerosis present a critical undertaking for the biotech and pharmaceutical industries.
In the consumer space, e-commerce is still in its early innings of growth. Online shopping continues to gain market share from brick-and-mortar retail, and that’s a trend that shows no signs of slowing anytime soon. In addition, an accelerating trend toward health and wellness bodes well for the specialty food retailing industry, meaning natural and organic foods.
Q: What is your portfolio construction process?
We construct a broadly diversified portfolio that is typically invested in 25-40 positions and invests in eight out of 10 economic sectors. The only two sectors not represented in the portfolio are telecom and utilities; we do not see the growth opportunity there. The three biggest focus areas for us are IT, consumer and healthcare because that is where we believe there is the most growth potential.
We place active bets on securities, and if a name is not included in the portfolio, we actively underweight that name. However, we will not be overweight or underweight by more than 5% relative to the benchmark’s weight in any sector at any point in time.
It’s important to note, however, that we are not momentum-type growth investors that chase after stocks that other investors are bidding up. We seek out overlooked opportunities and will be patient if the fundamental outlook remains intact. We aim to control volatility, while generating above-market returns. That balance, we think, makes our strategies ideal core holdings for many investors.
We follow a sell discipline when fundamentals change. There are times when our modeling has not come to fruition, or valuations are too stretched, or there are better opportunities elsewhere. When a security falls a certain percentage from its cost basis, we revisit the holding to reevaluate its role in the portfolio.
Q: How do you assess risk?
Risk management is a critical element of our process. We have a well-diversified portfolio and follow the guidelines related to sector positions, the size of individual holdings and sell discipline. But, we go well beyond these traditional measures.
We employ quantitative tools that help us be more risk-aware, which is a different concept than being risk averse. This helps us to optimize and amplify alpha generation without taking too much unnecessary risk.
Q: How do you define and manage risk?
As equity investors we define risk as loss of capital. We think of risk in two major ways. There is our fundamental risk assessment, which entails truly understanding the price risk in the security that we are investing in, via execution risk of the management team. There may also be valuation risk and economic risk, depending on the stock’s industry and sector.
We measure risk by thinking about beta, tracking error, volatility, and the source. We think about risk within our sector bets and in our positioning. We also take into consideration industry skews and factor exposures. In general, we think about risk on a stock specific basis, and try to assess, quantify, and align the risk with where we believe the greatest alpha generation is bound to occur.
Q: Which factors weigh in as you do quantitative risk assessment?
When we think about fundamental risk and quantitative risk together, it enables us to assess risk intelligently. Sometimes risk is mispriced. Presently, we are in an environment where we believe growth assets are undervalued while at the same time, perceived defensive assets are overvalued. That bodes well for the growth stocks in our portfolio.
Once we identify the securities we want to invest in on a fundamental basis, we use quantitative risk assessment that helps us understand the security on a stand-alone basis. We employ a regression analysis that helps us determine what percentage of the risk is driven by stock specific, idiosyncratic factors, and what risk percentage is controlled by market-driven factors.
Within our quantitative risk assessment process, we run a correlation matrix in order to understand the expected correlation of the security with the existing positions in the portfolio.
Additionally, we perform simulation analysis and portfolio trading analysis to quantify and understand, what percentage of capital we should be putting at risk given the expected alpha we are hoping to generate.
We believe the considerable emphasis we put on both alpha generation and risk management differentiates us from our peers. This is built into our process with Lew focusing more on fundamentals and Yana primarily focusing on risk management.
Not only do we look for companies with excellent fundamentals and attractive valuations, but we also make sure that the weightings of sectors and holdings reflect our confidence level in the upside potential and the risk involve – from both an overall portfolio and an individual stock perspective.
