Q: What is the history of the fund?

I have been involved with the fund since its inception in 2006. Essentially, this is a classic large-cap growth fund. 

While I’ve been focused on large cap growth for nearly a decade, previously I managed mid cap growth and technology funds and spent the first half of my career as a sell side analyst focused on small and mid cap companies.

When I initially started on the large cap strategy I thought the investment time horizon was shorter, but in fact the actual time horizon for some of my investments has been much longer. We have some positions that have been with the fund since inception. 
One of our advantages is that I have been involved with growth stocks my entire career, which spans more than 30 years. I spent the first half of my career as a sell-side analyst, focused on smaller- and mid-cap companies, and now as a fund manager for nearly a decade. 

Q: Which end of the large-cap spectrum are you most active in, and why?

In general, I prefer to invest in the upper end of the large-cap market segment because the business models tend to be mature, well-defined and stable. In my opinion, on the lower end of the market cap segment the execution risk does not offset the returns for the asset base that we have. 

We have about half our assets in companies with market caps above $50 billion. However, I tend to seek investment opportunities in the mid-lower upper segment of the large cap market from $10 billion to $50 billion because these companies can grow at relatively healthy rates but their business models tend to be well defined and stable 

In my opinion the very low end of the market cap range represents greater execution risks not always offset by the potential return. Still I do get involved in select small cap opportunities but these represent smaller positions in the fund

Q: What kind of growth are you pursuing?

I think of growth as a continuum. There are companies that are excellent and are growing at only 10% or 15%. There are also companies that are very consistent, stable, and capable of driving 15% to 20% bottom-line growth. Then there is the big group where companies are growing in excess of 25% per year. They tend to have a lot of momentum, but there is also a lot of volatility involved.

As I glance at our holdings, we own a spectrum of growth. At the low end of the continuum we own companies growing profits at 10% and at the upper end companies with the growth potential in excess of 25% per year. A company providing investors with a predictable and stable growth stream are wonderful long term holdings. Nevertheless, the potential appreciation may be greater if a company's growth profile is underrated as a result of a setback in an initiative. This is often an inflection point for reacceleration 

Q: What is your investment philosophy?

We are fundamentally driven and bottom-up oriented. We focus on high quality companies that have the ability to drive above-average revenue growth in areas of the economy that are growing and expanding. Moreover, we search for companies that have the ability to gain market share in what we believe to be attractive product or service areas.

Management is very important to growth. You need a management team that can articulate their vision and execute to it. If you agree with management’s perception and you believe that they have the long-term opportunity to achieve those objectives, then speed bumps represent opportunities to build the investment position as opposed to liquidating it.

It is typical for growth companies to hit roadblocks along the way. A product or service does not grow as expected or geographic expansion may prove to be more difficult. The challenge that these management teams face is the need to balance internal requirements with external growth objectives. If the balance is off, profits will temporarily be hurt. However, if objectives are ultimately achieved the investment will be rewarded.

Amazon.com, Inc for example has gone through periods of heavy investments. While areas of development may prove to be solid long-term opportunities, I may trim my core holding during these time periods with the expectation of rebuilding my holding as the investment cycle comes to an end. 

Q: How do you transform your investment strategy into a consistent process?

I focus on companies with certain characteristics which I aggregate into four areas. First, companies that have established leadership in new areas of the economy such as, Internet services, e-commerce, data analytics or cyber security. These companies typically enjoy positive momentum. 

Second, companies that have a distinct product or service in a growing sector such as consumer global franchise companies, biotech firms or software services. These companies typically have greater consistency to their quarterly performance. 

Third, companies experiencing reacceleration after a pause or deceleration and the last and the fourth emerging businesses that are innovative and disrupting the status quo in an industry or in a sector. 

I gravitate to certain personality types as a result of my background in research. The personality types that I like are companies that have momentum or companies that have some consistency to their business model. 

Furthermore, I like companies who emerge as leaders of the new economy. That could range from Amazon.com, Inc., Google Inc., Facebook, Inc., or Apple Inc. These are also the companies that go in and out of favor with investors.

Q: How do you analyze companies in your investment process?

We monitor hundreds of companies but we then drill down to the smaller sub segments. We like to meet with the management teams, talk to the sell-side analysts and take their view into account. In addition, we consult our internal analysts and discuss their outlook on the sector and on the company. 

At the broadest level our investment process involves monitoring the business fundamentals process and look for strategic inflection points, one security at a time.

We use technical analysis as another way to see the world in order to make sure we are not missing anything. Sometimes the technical charts give you a perspective you have not seen fundamentally. While it does not necessarily serve as the reason to buy or sell, it certainly enables you to time your investment.

Because I have been involved with growth stocks my entire career, there were periods when there were pages and pages of companies I could consider for investment or research. Then, around year 2000, after the Internet bubble burst, the environment for growth became rather hostile. Now, for the first time after many years, I see the continuum of growth companies really broadening. A lot of the innovation that we are seeing in healthcare and technology is beginning to migrate to other aspects of the economy. 
We have seen a bull market emerge for growth stocks in the past several years buoyed by moderate economic growth and a benign environment for interest rates. The value of a growth company is quite high in this environment.

Q: What is your research process and how do you look for opportunities?

Our investment management team is supported by a team of 40 global sector specialists with an average of 17 years experience. In addition, we have a small dedicated team of growth analysts in place specifically supporting our large cap growth strategy. 

As far as investment opportunities are concerned, we like to be early. For instance, I was one of the earlier investors in the biotech space. We have a pharmaceutical analyst who was active with Watson Pharmaceuticals, now Actavis Inc., and after discussing with him, I gained better insight into one of the companies I was looking at. 

The issue with Celgene Corporation was their intellectual property, as single molecule products are easy to replicate. The company was coming through the end of their patent portfolio cycle and they had reconstituted it, but Watson was going to contest that patent. The stock was in the penalty box, but from a fundamental viewpoint it was a healthy business with a wonderful pipeline of opportunity. In talking with the analyst, he thought Watson was going to delay their patent challenge.

In addition, we have a biotech analyst, who is also a doctor. He had done the full modeling on Celgene Corporation and felt there was a product that no one had really focused on. Although the business model was sound, we wondered whether we were looking at a revenue cliff in five or 10 years. With both the analyst letting me know that it was not something that would be pursued, and the biotech analyst telling me there were products they were not getting credit for, I was confident enough to build a fairly substantial position in Celgene Corporation at that time.

Intuit Inc. is another company I have been invested in for a long time. The street has been relatively neutral on the shares feeling it was too expensive, so I was able to buy into a company that had a virtual stronghold in the tax software area. The opportunity that I liked was that the company’s financial services for small and medium sized businesses had moved to the cloud and was selling these as a subscription model minimizing quarterly volatility, potentially generating significantly greater revenue long term while building a greater gap between themselves and competitors. We felt that the financial services provided by intuit was unique and underappreciated by the street. 

I have found that the companies with an early mover advantage have a strong management team, a healthy balance sheet, take early lead in the market and have a strong management team and a product profile that is quite compelling, are the ones that have the winning attributes in the long term.

Q: Who takes responsibility for the decision making process?

I am the one who makes the final decisions. There are also 40 sector specialists, who are seasoned professionals with sector neutral portfolios. When they build overweight positions within their sector, it becomes obvious how they feel. Each specialist covers between 40 and 60 names. 

Although the fund is focused mostly on domestic companies, our analyst team is global in outlook. They bring a good perspective on how they see global versus domestic valuations, which enables me to get a little bit bolder in my portfolio selection process. 

We have regular meetings where I interact with research and trading. They are aware of what I own and what I am monitoring. To sum up I have a comprehensive team at all levels but ultimately I make the final decision. 

Q: What is your portfolio construction process?

Our benchmark is the Russell 1000 Growth Index. However, every name that I choose for the fund is because I like it, not because it is in the index. We look at the index, but this fund is built bottom up, one company at a time. 

The goal is to build to a 1% or 2% position. Then, there are a handful of names that are particularly timely investments and tend to grow to 3% or 5%. My starter positions have turned out to be less than 1% because I want to monitor the fundamentals. In other words, I want to establish a larger investment knowing that I have not forgotten anything or left anything out. To do this, I want to go through one or two quarters and build from 1% to 2% over time. The two variables that I consider in the process are the risk reward profile and the economic backdrop.

At the portfolio level, we can see some element of concentration among the assets. The large positions ranging from 3% to 6%—the top 10 positions—represent about 30% of our assets. The top 60 positions represent 80% of the assets, respectively. 

We tend to trade around a core position. If I feel a company is embarking on something that is for the longer term and that it is going to take several quarters before we see them come out of it, I may just trim it to a smaller position during that time period. Afterwards, we will re-evaluate what they are doing. In Amazon.com, Inc., we went through a four-year period when they told me very little. Under these circumstances, you have to monitor the bottom line and watch companies like this more closely.

Q: How do you go about diversification?

We are broadly diversified, but healthcare, technology, and consumer discretionary tend to take up the lion’s share of our time and most of our assets. These are what we see as the best opportunities for growth. The only constant in those sectors is change, and that is where opportunities are.

With regard to other sectors, we invest in industrial and energy stocks and we also look for opportunities in international markets. However, the combined total of technology and healthcare represents about 55% of the assets. When we add consumer discretionary to the mix, these three sectors make up around 80% of the assets.

Q: Do you try to remain sector neutral in the fund?

I am not sector neutral in the fund. Rather, I am fundamentally driven. Our strategy is bottom-up oriented, which takes me to certain sector bets. I invest name-by-name in the companies where I see momentum, product line, execution, and where there is market acceptance.

We have 70 to 90 stocks in the portfolio, and no position will be plus or minus 1,000 basis points relative to the benchmark.

Q: What drives your sell discipline?

Our sell discipline is driven by lack of confidence in management or by deterioration in our longer-term outlook for a business. We may also sell if we feel that a stock is expensive relative to the framework we are looking at, or if there are better alternatives elsewhere.

Q: How do you define and manage risk?

I think of risk on a per stock basis. I manage risk by eliminating an investment that is just not working. Since I am dealing with blue chip companies of the highest quality, there is less volatility in the group that I generally focus on.

I also try to manage around the core positions, because when they misbehave they can be quite brutal, so I tend to shrink them during those time periods. Hopefully, we are smart enough to know when to rebuild, but sometimes we can make a mistake and do not get back in when we should.

As an additional risk measure, I also have frequent dialogue with our risk team, who play a key role in pointing in directions where risks are emerging based on factors that are generally not evident to a casual observer.