Alpha-Focused U.S. Equity Investing

When it comes to growth, we're looking for at least two times global GDP growth in free cash flows sustainable for the next five years, which academics have shown is very, very rare.

Can you speak to recent performance and how it has been driven by the team’s investment approach?

I think it all comes down to time arbitrage. Us, as a long-term investor, taking advantage of overreactions exhibited by short-term investors, which in our view dominate the market. We know that by looking at mutual fund turnover the past decades. The market's just become over and over-saturated with short-termism and it gives a long-term investor an opportunity to take advantage of overreactions. For example, in 2022, we purchased new companies like Netflix, PayPal, Shopify, Square, just to name a few. We also added to our existing position in Meta, all because these stocks were down significantly from their levels in 2021.

So when we see that sort of dislocation and that inefficiency in asset pricing, it gives an opportunity for a longterm investor to significantly add value to an investor's portfolio and those are some of the positions that added value in 2023. So by patiently scaling into these positions and patiently adding to existing positions like Meta and even names like Amazon, which it's been a very rare opportunity to invest in, it's been a big driver of performance here in 2023.

What do you look for in growth companies?

When it comes to growth, we're looking for at least two times global GDP growth in free cash flows sustainable for the next five years, which academics have shown is very, very rare. And what we're requiring is some sort of long-term structural growth driver, usually due to consumers changing the way they behave or businesses changing the way they operate. We want those long-term growth drivers to drive this sustainable free cash flow growth. So it's rare for the quality criteria to be met. It's rare for that growth criteria to be met. That gets you into the investment library. Then the third pillar, valuation, gets you into the portfolio.

We require all the companies that we invest in to have at least a 40% discount to our estimate of intrinsic value. So to hit all three pillars is very, very rare. These things don't happen every day. We take the opportunities when they come to us, whether it's some idiosyncratic company-specific event, or sometimes you get environments like 2022 or Q1 2020 or even going back to 2008 where you have these wholesale market opportunities and some high-quality companies become overly discounted just by getting thrown out with the bathwater.

Can you speak to the longevity and stability of the Growth Equity Strategies team?

So our team has never lost an analyst. Statistically speaking, we've had zero turnover on our investment team. This is very rare for an investment manager. Our portfolio manager, who is the founder of our investment philosophy and process, started this strategy going back to 2006. But even before that, he was implementing the same philosophy and process as the director of research at his previous firm. And this was three years before he started his track record and as director of research, he met our three senior analysts and actually mentored them and trained them for three years prior to becoming a portfolio manager and handpicking these three analysts out of a central pool of about 15 analysts. So our investment team, at least with the senior analysts who are still with us today, actually predates our strategy and goes back to around 2003. And when the entire team joined Loomis Sayles in 2010, bringing their GIPS-compliant track record, they only incrementally added analysts to methodically build out this kind of multi-generational ladder.

How is the fund diversified?

Well we look at the strategy as a core equity strategy that tends to perform well in different sort of market environments. Now we're not going to always outperform, but when you look at how the portfolio is diversified into different types of growth companies, some are more steady-Eddy growth companies, some are more highflying growth companies, it creates a well-rounded, diversified portfolio.

Why this fund and why now?

So if you look at our estimate of intrinsic value for our portfolio, on a weighted average basis, the all-cap growth strategy is trading within the range of 45 to 50% weighted average discount to our estimate of intrinsic value. This is well above average for our all-cap growth strategy, which averages around 38% going back to 2012. So when we look at our current opportunity set, and especially the companies that are currently in the portfolio, we're seeing some of the biggest opportunities we've seen since 2012.

Recorded January 30, 2024. For definitions of technical terms, please visit iaclarington.com/glossary and speak with your investment advisor.

The information provided should not be acted upon without obtaining legal, tax, and investment advice from a licensed professional. Statements by the portfolio manager or sub-advisor represent their professional opinion and do not necessarily reflect the views of iA Clarington. Specific securities discussed are for illustrative purposes only and should not be considered a recommendation to buy or sell. Mutual funds may purchase and sell securities at any time and securities held by a fund may increase or decrease in value. Past investment performance may not be repeated. Unless otherwise stated, the source for information provided is the portfolio manager. Statements that pertain to the future represent the portfolio manager’s current view regarding future events. Actual future events may differ.

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