Despite the persistent low-growth environment globally, US growth stocks had a stellar year in 2017. New Capital, the funds arm of EFG Asset Management and the winner of this year’s Top Mutual Fund Award in the US Large-Cap Growth Equity category, is confident that the secular bull market in the US, especially in the growth universe, is poised to continue. Joel Rubenstein, Senior Portfolio Manager, told BENCHMARK his firm’s effective strategy and what could be in store for growth investors in 2018 and beyond.
BENCHMARK (BM): Your actively managed growth strategy adopts a bottom-up process to identify stocks with potential. Can you give us more details on how you derive these high-conviction ideas?
Joel Rubenstein (JR): Sure. At New Capital, the majority of our ideas are sourced from our proprietary industry work, which includes attendance of sector-specific events such as the Consumer Electronics Show and the meetings of the American Society of Clinical Oncology. We also review pertinent trade journals to understand trends, market share shifts, and the movement of industry talent, which helps us identify new stock ideas.
All potential additions to the portfolio are then filtered through our proprietary investment process, which includes both qualitative and quantitative measures. We have employed this process for the past 15 years, and it has generated consistent alpha over the long term.
BM: In terms of sector allocation, you are around 35% invested in the technology sector. Is this a vote of confidence in the sustainability of the tech rally? What other sectors do you find attractive?
JR: Our sector weightings are a by-product of our stock pickings and reflect our underlying confidence in the individual constituent securities in the portfolio. While the technology sector accounts for the largest absolute weight in our portfolio, it reflects a slight underweight relative to the benchmark Russell 1000 Growth Index. Our largest overweight sector exposures against the index at year-end 2017 were industrials and financial services. We expect both sectors to benefit from an acceleration in US GDP growth and rising interest rates.
BM: Your large-cap growth portfolio also includes small-cap ideas. Do you expect an increase in your exposure to small-caps? What is your outlook on US large- and small-cap growth stocks?
JR: You’re right, our large-cap growth portfolio also includes the team’s best mid and small-cap ideas. At year-end 2017, small-caps accounted for around 6–7% of our large-cap growth portfolio, and we expect this percentage to stay between 6 and 8% in upcoming quarters.
We remain bullish on the prospects for growth stocks due in part to the stimulatory effects of the US tax reform, which is expected to drive higher capital expenditure, increased M&A activity, and an acceleration in GDP growth. We also believe that synchronized global growth, higher energy prices, and a relatively weak dollar should fuel growth for many companies in our portfolios.
While some of these catalysts are already factored into equity prices, we believe there is a strong likelihood for earnings estimates to increase substantially this year, including a realistic opportunity for S&P 500 earnings growth to exceed 20% compared to 2017. For the growth stocks in our portfolio, we expect earnings growth to exceed that of the broader market, given our expectations for market share gains and the companies’ ability to drive leverage with their superior financial models.
BM: Besides political and geopolitical risks, what other investment risks should investors look out for in 2018? How do you manage these risks?
JR: Aside from political and geopolitical risks, we are also paying close attention to central banks’ decision-making and company specific risks. On the former, we remain abreast of the US Federal Reserve’s policy as well as our companies’ direct exposure to interest rate risk; on the latter, the first step in our process is to screen companies on the basis of quality, which serves as a robust risk mitigation technique.
We also have the ability to increase the cash position in our portfolio, which can potentially protect downside during volatile periods in the stock market. Furthermore, we have a stop-loss policy in place to automatically review any positions that have gone down more than 20% from their original cost basis. BM