Edgewood Growth Fund Shareholder Letter - October 30, 2016
The Fund’s performance was +2.15% (Institutional Shares) and +1.77% (Retail Shares) for the trailing twelve months ended October 31, 2016. The performance of the S&P 500 Growth Index was +2.66% and the S&P 500 Total Return Index (including dividends) was +4.51% in the same period of time. Looking at the trailing six month period ended October 31, 2016, the Fund was +6.61% (Institutional Shares) and +6.46% (Retail Shares). In the same six month period, the S&P 500 Growth Index was +4.90% and the S&P 500 Total Return Index was +4.06%.
Over the past twelve months, the top portfolio contributors were Amazon.com Inc., ARM Holdings PLC, S&P Global Inc., Facebook Inc., and Equinix Inc. Amazon continues to grow both its online retail and Amazon Web Services businesses faster and more profitably than most thought over a year ago. While the stock has been a strong performer, we expect the company to continue innovating and growing at a very rapid clip. ARM Holdings was purchased by Softbank at a very attractive premium, most likely in recognition of what we saw in the company, namely dominance in IOT (Internet of Things), global smart phone growth and data centers. Basically, we were paid a lot faster on this investment than we had anticipated. S&P Global Inc. performed well due to a number of factors including the resilience of global debt issuance in the face of negative macroeconomic headlines such as Brexit, the strength in its non-ratings businesses such as Platts and the Index business, and the operational efficiencies CEO Doug Peterson has pursued. Facebook continues to benefit from the continued shift in advertising dollars from traditional media to digital media, especially mobile, as well as from the harvesting of profits from recently acquired assets such as Instagram. Equinix continues to benefit from the move of enterprises’ IT spending to the cloud which has created faster revenue growth than the market anticipated.
The top five portfolio detractors in the twelve months ended October 31, 2016 were Alliance Data Systems Corp., Gilead Sciences Inc., Cognizant Technology Solutions Corp., Celgene Corp., and Nike Inc. Alliance Data’s credit quality has declined slightly, which has been a bit of a drag on earnings growth. We believe this slight decline is coming to an end and the stock should begin to act better over the next year. Gilead has not performed well for several reasons. The first is because we underestimated the level of hepatitis C therapy discounting and secondly the level of political rhetoric and negative headlines surrounding the healthcare industry put pressure on the group. Cognizant Technology Solutions Corp., self-reported a potential violation of the Foreign Corrupt Practices Act earlier this year which sparked a significant decline in the stock price. Subsequent to reporting its third quarter earnings, Cognizant Technology Solutions Corp., confirmed our assumption the violation was not material and should not affect past or future contracts. The company remains extremely well positioned to help companies manage the digital transformation. Celgene’s stock has also gotten caught up in the political headlines but we believe the underlying business is as robust as ever. We think the prevailing Wall Street earnings estimates for the company will prove to be low. Nike has faced improved competition from Adidas and continued pressure from Under Armour as well as a few of its own product missteps. The company is in the middle of new product introductions which should reinvigorate sales growth. It remains one of the most dominant brands that we know, with a proven management team led by CEO Mark Parker.
As the USA gets past the election season, we think the underlying economic growth is much the same as it has been for several years now. We would characterize this growth as muted but positive. We continue to believe that the worldwide growth prospect is much the same. As you have seen us write numerous times, we think our main job is to have a portfolio of companies that we think will grow earnings per share between 15-20% per annum, and to pay a reasonable multiple for that earnings growth. If we can continue to do this, we believe portfolio performance should be good long term.
As for interest rates, we got one rate hike last December and we think there will be another this December. We continue to believe that the pace of rate hikes will be gradual and probably pretty well telegraphed.
Edgewood Management LLC
This material represents the manager's assessment of the portfolio and market environment at a specific point in time and should not be relied upon by the reader as research or investment advice.
Definition of Comparative Indices
The S&P 500 Growth Index is a market capitalization weighted index consisting of those stocks within the S&P 500 Index that exhibit strong growth characteristics.
The S&P 500 Index consists of 500 stocks chosen for market size, liquidity, and industry group representation. It is a market-value weighted index (stock price times number of shares outstanding), with each stock's weight in the Index proportionate to its market value. The "S&P 500" is one of the most widely used benchmarks of U.S. equity performance.
Mutual fund investing involves risk, including loss of principal. The Edgewood Growth Fund is a non-diversified fund.