The Large Cap Growth strategy combines a disciplined “top down” analysis with a detailed fundamental, “bottom up” security selection process.
|Macro-Economic Sector AnalysisLCM’s top down analysis aims to identify macroeconomic trends that represent growth opportunities in the global economy – this macro analysis helps to determine our internal growth rates for sectors, as well as for the companies within them.A variety of data sources is used to establish relative value expectations of growth sectors that are likely to benefit from these broad themes and outperform over the next 12 to 24 months. Growth sectors are defined as those with higher potential revenue and profit growth than that of the US economy.|
Given recent events and economic data, as well as priorities demonstrated by the Obama Administration, LCM’s top down analysis has lead to several overriding themes including:
- Resource/Inflation Concerns – The likelihood of rising inflation in the years ahead as in a highly leveraged world, economic growth is a necessity. Higher resource prices will be a major contributor, as well as unprecedented levels of money supply growth as huge economic stimulus flows through the economy with a multiplier effect. Upon examining resource concerns, LCM has come to the conclusion that resources are intertwined. For example, conventional fuel shortages will not be an isolated problem as there are multiple materials involved in its extraction and production, including steel, water, as well as more energy (that will see their own strained supply/demand relationships). Even alternative energy sources are intertwined, as building renewable sources, like wind farms will take tremendous amounts of energy, steel, copper, and other materials.
- Developing Economies – The emergence of the growing economies of China and India as well as the rest of the developing world. Currently the economies of the developing world nearly equal that of the developed world, and will soon surpass it. Rising populations and incomes (roughly 40% of the developing world currently lives on less than $2 a day) will have implications for US multinationals that can use their dominance in developed markets to enlarge their footprints in areas of higher economic growth (this includes consumer staples and technology companies).
- Infrastructure – The compelling need for infrastructure of all types in both the developed and developing world. This infrastructure includes the rehabilitation of existing systems, as well as building new infrastructure systems including alternative energy, smart grid, and healthcare systems.
- Demographics – The aging of the American population presents various investment opportunities in the health care arena. Further, overall world population growth strains global food supply, and relates to opportunities in the materials sector, such as fertilizer stocks (and extends further to energy, water, and other materials when the full food production process is taken into account).
The Investment Committee’s discussions will often lead to the development of more specific “sub-themes.” For example, discussions relating to the burgeoning growth of China and India have led the committee to realize that these economies will need tremendous amounts of additional energy in order to sustain growth. With the conclusion that this increased energy demand will intensify the world’s supply crunch, the investment team will review and analyze the energy sector to identify companies that will benefit from this derivative event.
LCM’s top down approach helps to focus the firm’s bottom-up security selection process into the growth sectors and industries identified by the Investment Committee. Portfolio managers identify candidates from the S&P 500 and other sources that are consistent with the firm’s investment philosophy. The result of the analyses is a “watch-list” of approximately 150 companies. These stocks should possess:
• Market dominance
• A superior operating record and balance sheet
• Projected growth rate greater than the market
• Reasonable price: defined as having a forward PEG less than that of the market
The Investment Committee will perform in-depth research on these companies in order to determine the ones to be included in the Large Cap Growth model portfolio. Please click here to learn more about LCM’s fundamental research process, including both security selection and sell discipline.