Portfolio Insights: Large Cap Strategies

TRANSCRIPT

Patrick Kelly: Yes. Well, as I mentioned earlier, all of this innovation and digitization of these sectors is creating winners and losers across sectors and we do want to be positioned in the companies that are innovating, the companies that are benefitting from the change and benefitting from the acceleration in these secular growth trends. But we also have been adding some COVID recovery plays in anticipation of a vaccine in the first half of 2021. These are names that we think could rally significantly over the next year if a vaccine is widely distributed, so we have been adding exposure to some of those names. Jessie Quick: My last question, and then I'll turn it over to the audience, is the valuation of growth stocks. Growth stocks have been resilient and have had a strong year, even in the face of all this adversity, so how do you look at valuations, and what is your sell discipline in your process if you find a stock has maybe gotten ahead of itself? Patrick Kelly: We set 1, 3, and 5-year price targets on all of our companies, and we're constantly assessing the risk/reward on all of them. We maintain our own financial models. Our models go out a minimum of five years and in some cases, longer to value our companies. We've always said that one of our favorite valuation metrics is enterprise value to free cash flow. And again, we do monitor the risk/reward, so if we see a stock is approaching our price target, we will trim or sell the name or rotate into another name that has a better risk/reward. I feel like I've been asked this growth versus value question consistently over the past 10 years, and I feel like my answer is consistently been that it's always difficult to predict whether growth or value is going to outperform in the near term, or over the next six months.

growth and value is because of what we've been discussing over the past several years and that we're in the early days in one of most innovative times in history; and this innovation is creating winners and losers across sectors. It's creating significant disruption across sectors, and as I mentioned earlier, the digitization of these sectors is creating winners and losers across sectors. If you look at what's happening to the traditional retail sector that has digitized, there's obviously been a lot of value stocks in the retail space that are now bankrupt. If you look at the media sector, that sector is digitized, and Netflix has disrupted many of the traditional media business models, the traditional media companies have been value stock for years. Many of the auto names are value names, but what is their outlook over the next five to 10 years with the paradigm shift that's going on in auto? The regional banks–what is their outlook? As that sector digitizes, how many of those companies are going to successfully transform their businesses and successfully compete? You can look at energy companies and the outlook for some of these companies over the next five to 10 years as we move to electric vehicles and alternative forms of energy. And as I said earlier, I think there will continue to be a premium paid for high-quality long duration growth assets because there are so many sectors and companies whose business is being disrupted. What's different about the current environment is that there's so many companies out there where the outlook over the next five to 10 years is very uncertain. Looking at some of the larger growth names and looking at their valuations, such as Apple, which is up 5% free cash flow yield on 2021 numbers. They're returning 100 percent of their free cash flow to shareholders

My view is that growth in companies that are innovating will outperform over the long term, and I think the reason that we are seeing such disparity between

Conference Call 4/9