Focus Growth 1Q 2021
Markets (total return) performed as follows:
Sources: SS&C Advent, Bloomberg
Past performance is not indicative of future results. Aristotle Focus Growth Composite returns are presented gross and net of investment advisory fees and include the reinvestment of all income. Aristotle Atlantic Composite returns are preliminary pending final account reconciliation. Please see important disclosures at the end of this document.
The U.S. equity market rose during the first quarter, making it the fourth consecutive quarter of positive performance. Overall, the S&P 500 Index gained 6.17% during the period. Concurrently, the Bloomberg Barclays U.S. Aggregate Bond Index fell 3.37%. In terms of style, the Russell 1000 Value Index outperformed its growth counterpart by 10.32% during the quarter, the second straight quarter that large-cap value stocks led large-cap growth stocks.
On a sector basis, eight of the eleven sectors within the Russell 1000 Growth Index finished higher for the quarter, led by Energy, Communication Services and Real Estate. The decliners were Consumer Discretionary, Consumer Staples and Information Technology.
The U.S. continued to make significant progress in combatting the spread of the COVID-19 virus, as the number of new daily cases fell to as low as ~39,000 in mid-March from its high of ~315,000 in early January. In addition to the ongoing rollout of the Pfizer and Moderna vaccines, the FDA issued emergency use authorization for Johnson & Johnson’s single-shot vaccine. The CDC reports that, in the U.S., over 180 million vaccine doses have been delivered, over 140 million doses have been administered, and almost 30% of the population has received at least one dose to date.
On the political front, the Democratic party secured control of the Senate after the Georgia runoffs, paving the way for Congress to pass another round of stimulus. The $1.9 trillion American Rescue Plan issued $1,400 in direct payments to millions of individuals, extended unemployment benefits, expanded the child tax credit, continued eviction and foreclosure moratoriums, and provided additional funds for states, small businesses, schools, vaccine distribution and testing.
The size of the latest round of stimulus and expectations of a rapid recovery sparked fears of inflation and contributed to a sharp increase in the 10-year Treasury yield, although at 1.74% as of March 31, 2021, the 10-year yield remains low. In a continuation of prior actions, the Federal Reserve remains accommodative, citing the need for a full labor market recovery and sustained levels of higher inflation before a potential re-evaluation of policy.
Performance and Attribution Summary
For the first quarter of 2021, Aristotle Atlantic’s Focus Growth Composite posted a total return of 1.87% gross of fees (1.84% net of fees), outperforming the 0.94% total return of the Russell 1000 Growth Index. Since its inception on March 1, 2018, the Focus Growth Composite has posted a total return of 21.17% gross of fees (20.77% net of fees), while the Russell 1000 Growth Index has reported a total return of 20.99%.
|Performance (%)||1Q21||1 Year||3 Years||Since Inception*|
|Focus Growth Composite (gross)||1.87||58.58||22.36||21.17|
|Focus Growth Composite (net)||1.84||58.44||21.96||20.77|
|Russell 1000 Growth Index||0.94||62.74||22.77||20.99|
During the first quarter, the portfolio’s outperformance relative to the Russell 1000 Growth Index can be attributed to security selection, while allocation effects modestly detracted from relative results. Security selection in Consumer Discretionary, Information Technology and Industrials contributed the most to relative performance. Conversely, security selection in Health Care and Materials as well as an underweight in Communication Services detracted the most from relative performance.
|Relative Contributors||Relative Detractors|
|NXP Semiconductors||Adaptive Biotechnologies|
|Guardant Health||Global Payments|
NXP Semiconductors N.V.
NXP Semiconductors outperformed during the first quarter, benefiting from a cyclical recovery as the U.S. economy began reopening following COVID-19 lockdowns. Th e company continued to experience strong demand in automotive and industrial end markets, as global automotive production continued to experience strong unit growth compared to earlier in 2020. In addition, the stock’s performance was boosted by the announcement that it would be added to the S&P 500 Index.
Expedia Group, Inc.
Expedia outperformed during the first quarter as distribution of COVID-19 vaccines accelerated and drove increased expectations for a recovery in travel activity. Th e company had significantly reduced expenses during the pandemic, which should drive strong operating leverage when travel spending improves.
Adaptive Biotechnologies Corporation
Adaptive Biotechnologies underperformed during the first quarter as higher P/E multiple growth stocks were pressured by the rapid rise in interest rates. Adaptive reported better-than-expected revenues as clonoSEQ assay penetration continued to improve. During the quarter, the company announced that Genentech had decided to halt development of a cancer therapy drug in partnership with Adaptive; however, the decision was based on safety of the target, not a safety issue with the drug. Adaptive noted that the partnership with Genentech continues to proceed with a great deal of excitement from both companies.
Coupa Software, Inc.
Coupa Software underperformed during the first quarter, as the stock suffered from the market rotation out of high-valuation, high-growth technology stocks and into more cyclically exposed technology stocks and sectors. Despite reporting strong fourth quarter 2020 earnings results during the quarter, the company provided disappointing revenue guidance for fiscal 2022, although we believe the guidance is conservative and could improve after Coupa completes the transition to a subscription-based revenue model for its recent acquisition of LLamasoft.
Recent Portfolio Activity
The table below shows all buys and sells completed during the quarter, followed by a brief rationale.
Past performance is not indicative of future results. Attribution results are based on sector returns, which are gross of investment advisory fees and include the reinvestment of all income. Please see important disclosures at the end of this document.
MSCI provides investment decision support products and tools, including market indices and analytics for investment portfolios, risk management, ESG/climate and real estate. The company services clients globally, including asset managers, wealth advisors, asset owners and other financial intermediaries. The company operates three main business segments: Index (60% of revenues), Analytics (30% of revenues) and Other (10% of revenues), which includes ESG/climate and real estate. MSCI is the global leader in providing benchmarks to institutional investors, with over 225,000 MSCI-branded benchmarks across multiple asset classes. Its global equity indices are the most widely used benchmarks for international investment funds.
In our view, MSCI is a financial services company with financial index and analytics franchises that deliver peer-leading organic growth and margins. Due to the quality of the company’s offerings, high switching costs for clients and significant barriers to entry, the company enjoys substantial competitive advantages that continue to drive high customer retention rates across all business segments.
MSCI’s Index business, a subscription-based model with recurring revenues and high retention rates, continues to benefit from the shift to passive investing. In addition, rising equity markets and strong net inflows to passive equity-linked ETFs have driven strong growth in asset-based fees over several years. ESG/climate-related indices, data and analytics represent a significant growth opportunity for MSCI, in our view. Comprising less than $160 million in annual run-rate revenues currently, this business is the fastest-growing segment for the company in a potential $2 trillion market opportunity over the next several years. We believe additional opportunities exist for the company in high-growth, high-margin businesses, such as fixed income and private assets (e.g., real estate), as well as new client verticals, including wealth management.
Qorvo develops, manufactures and sells a wide range of radio frequency (RF) technologies that enable devices big and small to communicate with each other. Its products are made for mobile communications (from phones to cell towers), infrastructure applications (smart meters and WiFi base stations), and aerospace and defense systems (radar and satellites). It serves major cellphone manufacturers such as Apple, its largest customer, and Huawei with 4G and 5G antennas and other communication equipment. Unlike many other chip companies, Qorvo operates its own foundry where RF devices can be made to specifications.
As an industry leader in RF deriving 70% of company revenue from wireless products, Qorvo is well positioned to experience sustained revenue and earnings growth during the current 5G investment cycle, in our view. Adoption of 5G technology continues to gain traction, with numerous new handsets expected to be rolled out this year while major carriers continue to increase nationwide 5G coverage. Apple successfully launched its 5G mmWave iPhones in the second half of 2020, and the products continue to enjoy sales strength thus far in 2021. With more content per iPhone than competing models, Qorvo should experience improved revenue and earnings growth if sales of iPhones continue to accelerate. We believe the RF total addressable market (TAM) can grow from the current level of ~$12.5 billion to $18 billion-$19 billion by year-end 2022 as 5G penetration rates increase and RF dollar content per phone increases due to the increased technical complexity of 5G communications. We also expect Qorvo to experience improving gross margin over time if its high-end, specialty RF products see better pricing dynamics while in-house supply chain management supports improving cost trends.
We sold our position in Facebook to fund an increase in our weighting in Alphabet and initiate a position in Qorvo. We believed Facebook confronted more intense regulatory headwinds relative to Alphabet and preferred to consolidate our investment in the growth of digital advertising into one holding.
Ameriprise Financial, Inc.
We sold our position in Ameriprise to fund an initial position in MSCI. We believed shares of MSCI offered more attractive upside potential going forward.
The outlook for U.S. large-cap equities will likely be driven by a reopening of the economy, steady Federal Reserve monetary policy and additional federal fiscal stimulus. The increase in COVID-19 vaccination levels, coupled with a steep decline in COVID-19-related hospitalizations, has led many states to reopen their economies. We believe these reopenings are the main driver of the recent increase in employment, as well as improvement in various other economic statistics. In our view, the Federal Reserve seems committed to continue to stay on the sidelines with regard to changes in monetary policy as the debate over whether rising inflation represents a material risk takes center stage. The recent increase in inflation has pushed long-term interest rates higher, which is largely responsible for the contraction in P/E ratios of higher-multiple stocks, in our opinion. We believe that the positive offset to higher interest rates is an expectation of more robust earnings growth, driven by states reopening and federal fiscal stimulus. We believe the magnitude of the earnings growth acceleration should be enough to offset the compression in equity P/E multiples. Based upon our expectation that the U.S. economic recovery will be swift in nature, we expect to see a shift in investor sentiment in the back half of the year away from cyclical stocks to the more secular growth stocks. Our focus will continue to be at the company level, with an emphasis on companies with secular tailwinds or strong product-driven cycles.
The opinions expressed herein are those of Aristotle Atlantic Partners, LLC (Aristotle Atlantic) and are subject to change without notice. Past performance is not a guarantee or indicator of future results. This material is not financial advice or an offer to purchase or sell any product. You should not assume that any of the securities transactions, sectors or holdings discussed in this report were or will be profitable, or that recommendations Aristotle Atlantic makes in the future will be profitable or equal the performance of the securities listed in this report. The portfolio characteristics shown relate to the Aristotle Atlantic Focus Growth strategy. Not every client’s account will have these characteristics. Aristotle Atlantic reserves the right to modify its current investment strategies and techniques based on changing market dynamics or client needs. There is no assurance that any securities discussed herein will remain in an account’s portfolio at the time you receive this report or that securities sold have not been repurchased. The securities discussed may not represent an account’s entire portfolio and, in the aggregate, may represent only a small percentage of an account’s portfolio holdings. The performance attribution presented is of a representative account from Aristotle Atlantic’s Focus Growth Composite. The representative account is a discretionary client account which was chosen to most closely reflect the investment style of the strategy. The criteria used for representative account selection is based on the account’s period of time under management and its similarity of holdings in relation to the strategy. Recommendations made in the last 12 months are available upon request.
Returns are presented gross and net of investment advisory fees and include the reinvestment of all income. Gross returns will be reduced by fees and other expenses that may be incurred in the management of the account. For example, a 0.5% annual fee deducted quarterly (0.125%) from an account with a ten-year annualized growth rate of 5.0% will produce a net result of 4.4%. Actual performance results will vary from this example.
The Russell 1000® Growth Index measures the performance of the large cap growth segment of the U.S. equity universe. It includes those Russell 1000 companies with higher price-to-book ratios and higher forecasted growth values. This index has been selected as the benchmark and is used for comparison purposes only. The Russell 1000® Value Index measures the performance of the large cap value segment of the U.S. equity universe. It includes those Russell 1000 companies with lower price-to-book ratios and lower expected growth values. The S&P 500® Index is the Standard & Poor’s Composite Index of 500 stocks and is a widely recognized, unmanaged index of common stock prices. The Russell 2000® Index measures the performance of the small cap segment of the U.S. equity universe. The Russell 2000 Index is a subset of the Russell 3000® Index representing approximately 10% of the total market capitalization of that index. It includes approximately 2,000 of the smallest securities based on a combination of their market cap and current index membership. The Dow Jones Industrial Average® is a price-weighted measure of 30 U.S. blue-chip companies. The Index covers all industries except transportation and utilities. The NASDAQ Composite Index measures all NASDAQ domestic and international based common type stocks listed on The NASDAQ Stock Market. The NASDAQ Composite includes over 3,000 companies, more than most other stock market indices. The Bloomberg Barclays U.S. Aggregate Bond Index is an unmanaged index of domestic investment grade bonds, including corporate, government and mortgage-backed securities. The WTI Crude Oil Index is a major trading classification of sweet light crude oil that serves as a major benchmark price for oil consumed in the United States. The 3-Month U.S. Treasury Bill is a short-term debt obligation backed by the U.S. Treasury Department with a maturity of three months. While stock selection is not governed by quantitative rules, a stock typically is added only if the company has an excellent reputation, demonstrates sustained growth and is of interest to a large number of investors. The volatility (beta) of the Composite may be greater or less than its respective benchmarks. It is not possible to invest directly in these indices.
Aristotle Atlantic Partners, LLC is an independent registered investment adviser under the Advisers Act of 1940, as amended. Registration does not imply a certain level of skill or training. More information about Aristotle Atlantic, including our investment strategies, fees and objectives, can be found in our Form ADV Part 2, which is available upon request. AAP-2104-17