- Portfolio returned -5.2% (gross) and -5.4% (net) versus -3.6% for the Russell 1000 Growth Index as sharply rising interest rates negatively impacted longer duration growth companies in August and September
- Higher business quality characteristics that SGA portfolio companies possess such as high margins, sales growth stability, and low debt underperformed for the quarter
- Strong performances by Apple and Tesla, which were not owned in the portfolio, cost about 1.3% in relative return
- Walt Disney was sold due to forced attrition to make room for a new position in Starbucks which our analysis indicates is likely to return to its pre-COVID level of growth and profitability
- Trimmed positions in Danaher, Abbott, and Intuit on strength and added to positions in IQVIA, Intuitive, MSCI, Netflix, Salesforce, and Workday among others
- Higher interest rates are likely discounted in current stock prices, but a recession and its impact on corporate earnings is not yet factored into consensus earnings forecasts
- Coming downward earnings revisions for the index and eventual moderation of interest rate pressure should be a powerful tailwind to our relative performance in coming quarters as they have been historically (see Russell 1000 Growth 2-Year EPS % Change chart on Page 2)
The opinions expressed herein reflect the opinions of Sustainable Growth Advisers, LP and are subject to change without notice. Past performance is no guarantee for future results. This information is supplemental and complements a GIPS Report that can be found with composite performance. The securities referenced in the article are not a solicitation or recommendation to buy, sell or hold securities. This commentary is provided only for qualified and sophisticated institutional investors.
Results are presented gross and net of management fees and include the reinvestment of all income. The Net Returns are calculated based upon the highest published fees. The net performance has been reduced by the amount of the highest published fee that may be charged to SGA clients, 0.75%, employing the U.S. Large Cap Growth equity strategy during the period under consideration. Actual fees charged to clients may vary depending on, among other things, the applicable fees schedule and portfolio size. SGA’s fees are available upon request and also may be found in Part 2A of its Form ADV. The performance record presented for periods prior to July 1, 2003 occurred before to the inception of SGA and represents the portable performance record established by two of SGA’s founders (and investment committee members) Gordon Marchand and George Fraise while affiliated with a prior firm. The largest contributors and detractors are determined using a ranking of the absolute contribution to portfolio return by each security held over the period under consideration. Policies for valuing investments, calculating performance, and preparing GIPS Reports are available upon request. Upon request, free of charge, SGA can provide a list of all portfolio holdings held in SGA’s U.S. Large Cap Growth portfolio for the past year. SGA’s earnings growth forecast data is based upon portfolio companies’ non-GAAP operating earnings.