Victory Large Cap Growth Fund
US > Large-Cap > Growth
Dec 08, 2009
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52 Week HL
19.82 - $17.45
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Inception Date
Sep 27, 2012
Q: What are the guiding principles of your investment philosophy?
A : Our philosophy is that earnings growth drives stock prices over the long-term. We are long-term investors and the objective of the fund is to generate alpha over time by investing in a focused portfolio of high-growth companies. We believe in having a high-conviction portfolio.
We primarily focus on larger cap companies with growth potential and competitive advantages that are reasonably priced in the market.
Q: How does your investment philosophy translate into the investment strategy?
A : The fund invests primarily in U.S. equity securities of companies whose growth prospects appear to exceed those of the overall market. It normally invests primarily in large capitalization stocks which are issued by companies with capitalizations of $10 billion and above.
Our strategy is one of focus, long-term investment, high quality and growth. We stress equal amounts of growth and quality.
Q: What is your research process?
A : The investment process starts by using quantitative screens to sift through an investable universe of approximately 12,000 companies. We begin by screening for companies with market capitalizations greater than $1 billion.
From there we focus on metrics such as revenue growth, earnings growth and the return on invested capital. Also, we closely examine balance sheets and income statements for financial strength and cash flow trends.
We review historical returns for consistency and sustainability. Our belief is when earnings growth is high but return on invested capital is low, that company is overly dependent on capital. We don't place any overriding emphasis on any one metric. We prefer to see that consistentcy among them and that they make sense when viewing the balance sheet.
We look for above average revenue growth and future earnings growth greater than 15%. Of equal interest is to know where expectations lie. We know if a company reports absolute earnings growth 24%, it’s quite attractive in absolute terms, especially given the economic backdrop. However, if consensus estimates called for 25% or 26%, we know that company is likely to sell-off.
Another factor influencing how a stock reacts depends on company guidance. There again, it’s useful to know the range of expectations. Any disappointment on that front won’t necessarily keep us out of the stock. But if a company has the characteristics we look for, is trading very strongly and expectations are sufficiently high that we feel there is a potential to disappoint, then we will wait.
Idea generation is not solely driven by quantitative screens. We get ideas from existing holdings by constantly meeting with management teams and inquiring about the new areas of growth. A hallmark of successful growth companies is that they look ahead. They instinctively know that at some point growth in their current market will slow and must therefore look for new avenues of growth.
We employ a lot of fundamental analysis to come up with our version of intrinsic value and expectations of growth, which we compare with widely available models and current market price to decide whether the company warrants a spot in the portfolio.
Through our analysis, we take a comprehensive view of what drives company earnings and look for those that can grow earnings greater than 15%, on average, over the course of three to five years. The quality of earnings is important too. As such, we prefer that the majority, if not all, of earnings come from core operations.
The next step is conducting a peer analysis. What makes a particular company more attractive than its peers? What competitive advantage does it enjoy? Once we identify that advantage, we make a reasonable assessment as to how long it can last because high returns attract a lot of competition and nothing lasts forever.
Finally, we meet with management in order to understand their plans for the near-term as well as how they intend to invest for future growth. Between the two, we are more interested in plans for growth over the longer-term. As important as it is to meet the people who run the company, communication with management doesn't necessarily begin or end with the CEO. In certain instances it’s just as important to meet the people responsible for key divisions.
The final step for any company under consideration is portfolio construction, how does the company fit in the portfolio. Our process is a bottom up approach that results in a portfolio that is typically different from our benchmark, the Russell 1000 Growth Index. While we begin and end with company analysis, the ultimate focus is improving the overall prospects for the portfolio. This involves a lot of debate and time but at some point we put the company to a vote. Throughout this part of the process, we use Northfield software to give us a precise view on how changes being considered are expected to affect the portfolio.
Q: Could you illustrate your research process with a few examples?
A : One example is Monsanto, a U.S.-based agricultural biotechnology company. We first looked at the company in 1998 yet bought it in 2004. The company went through a few management changes and finally found the right fit with Hugh Grant, the current CEO. The main attraction to us has always been the company’s biotech franchise that improves productivity in the agricultural industry. As the company endured management changes it also divested many non-core businesses. As a result the true value of the company began to shine through and we made our initial purchase in 2004.
At the time, the only people who followed the company were chemical analysts and they failed to recognize the true value of the company. Over time, as the seeds and traits business continued to grow and Monsanto continued to gain market share in corn, operating margins continued rose steadily. Monsanto’s success was difficult to ignore and soon agricultural analysts began to follow the company. As bright as the future remains for Monsanto’s yield maximizing seed technology, we trimmed it several times over the last twelve months as the company faces some near to intermediate headwinds.
Another example is CME group, the world's largest futures and options exchange. In 2004, the company’s growth prospects were not fully appreciated. We concluded its main competitive advantage was the liquidity it had that others couldn't build overnight more than its Globex trading platform which was benefitting from a shift in the open outcry methods of the futures pits to an electronic exchange.
Liquidity is a primary source of friction and cost. As the Chicago Mercantile Exchange, leveraged its dominant pool of liquidity and combined it with an electronic platform in an industry enjoying tremendous volume growth, it grew earnings at an increasingly rapid pace. Here again, analysts who followed the company at the time did not fully appreciate the earnings power of the company and as a result, earnings results were significantly higher than what was expected. Naturally, strong absolute earnings and better than expected results drove performance. Over the last two years, widespread deleveraging in the financial industry has led to a sharp decline in futures volumes and more tempered earnings growth, which led us to sell our position.
The companies we are interested in typically don’t run a high risk of imploding. The bigger and inevitable risk is that earnings growth will slow at some point in the future. When that happens we have to be ready with a fresh list of substitutes.
In terms of sell discipline, we will reduce or eliminate a position for the following reasons - deteriorating fundamentals impacting expected earnings growth, relative valuation has become less favorable, identification of a better investment opportunity, or an automatic trim if a security reaches 10% of the portfolio.
We use Northfield software to help us manage risk in the portfolio. Utilizing Northfield helps us identify fundamental and macro risk factors, track our risk budget and track the portfolio’s trends in alpha, predicted beta, tracking error, information ratio, etc.
Q: How is your portfolio constructed?
A : The team uses bottom-up fundamental approach to build a focused portfolio of approximately 25-30 high-quality companies with above average earnings growth. Conviction is a differentiating characteristic and it’s not unusual to have top holdings between 6.5% and 7.5%. Our minimum market capital is $1 billion. The actual market cap is typically greater than $5 billion, the average is $35 billion and the median is $20 billion. Our benchmark is the Russell 1000 Growth Index and the annual portfolio turnover is between 30% and 50%.
Most of the companies in the portfolio are usually known by most investors but a smaller part of the portfolio, typically between 20% and 25% is invested in emerging growth companies. Having this mix of established and emerging growth companies gives the portfolio another level of diversification beyond the traditional way of viewing diversification on the basis of sector and industry.
The third level of diversification we use in portfolio construction is the balance between cyclical and secular exposure. Being overly exposed to either extreme can result in a lot of unnecessary volatility, especially at inflection points in an economic cycle. Therefore, we always strive to keep a good balance.
Finally, portfolio weightings reflect which holdings have the best risk/reward relative to other holdings in the portfolio. The biggest holdings have the highest conviction and the smallest holdings are either new, smaller due to their inherent volatility or recently reduced due to disappointment and therefore a source of funds for new ideas.
Q: What are the risks perceived in the portfolio and how do you mitigate them?
A : The biggest risk in the portfolio is the failure of any company to live up to expectations. Even the best companies can experience a less than perfect quarter. Our job is to determine whether shortfalls are temporary or secular in nature. That’s not always an easy task because well run companies don’t usually fall apart in one quarter. We minimize earnings risk by continuously meeting with company managements, analysts and other industry experts and by reducing or eliminating companies we believe have deteriorating fundamentals.
Other risks include sector and industry exposures. Our portfolio seldom looks like our benchmark. The sector differences can hinder performance if stocks trade more as a group versus company specific fundamentals. We mitigate that risk by not having any sector or industry represent an overwhelming part of the portfolio and making certain to be properly diversified.
The final risk we see in our portfolio, and perhaps the most difficult to forecast is market risk. There are times when growth stocks, or equities in general, are out of favor relative to other asset classes. It is difficult to predict the magnitude or duration. Last year was a perfect example. The worst performing stocks in our benchmark in 2008 were Microsoft, Apple, Google and Schlumberger. We owned three out of the four and now own Microsoft as well. Each is a dominant company with enviable franchises and profitable business models. Their performance last year was less about fundamentals and more about volatility and the need for liquidity. Knowing that, we did not sell any of our holdings in each and this year we’ve been rewarded for staying the course. In our view, the best mitigant against market risk over time is strong company fundamentals and conviction.
Annual Return
|
|
2024 | 2023 | 2022 | 2021 | 2020 | 2019 | 2018 | 2017 | 2016 | 2015 | 2014 |
VFGAX |
|
0 |
-100 |
-57.4 |
-17.4 |
30.5 |
0 |
-2 |
24.6 |
-4.3 |
7.4 |
|
in percentage