Strategy: The Focused Growth portfolio is a concentration of Winthrop Capital’s top equity ideas across medium- and large-cap companies. The portfolio invests in companies with above-average revenue and earnings growth, performance momentum, and a sustainable business model for the future. Our relative value discipline allows us to measure risk and reward for each security within a company’s capital structure and invest where we see the best opportunity.
Key Components: High conviction, high growth potential companies in a concentrated portfolio.
Top 5 Holdings: AMZN, FB, MSFT, GOOGL, and PYPL
Large Cap Blend
Strategy: The Large Cap Blend portfolio seeks investment opportunities in medium and large public companies which are generating excess free cash flow and whose equity securities are trading at a discount to our estimation of intrinsic value. Our relative value discipline allows us to measure risk and reward for each security within a company’s capital structure and invest where we see the best opportunity. Every security identified for investment must have a specific objective within the portfolio, and one or more clearly defined catalysts capable of producing an excess relative return over the ensuing 12-18 months.
Key Components: Blend of both value and growth stocks with a low tracking error to the S&P 500. Approximately 40-55 holdings at a time.
Top 5 Holdings: MSFT, AAPL, GOOGL, DIS, and JNJ
Strategy: The Dividend Growth portfolio seeks investment opportunities in large public companies that create shareholder returns through above average and sustainable dividend payments. The portfolio generally consists of a higher allocation to cyclically defensive companies with very stable business models. Our relative value discipline allows us to measure risk and reward for each security within a company’s capital structure and invest where we see the best opportunity.
Key Components: Value-oriented stocks that pay a dividend, and have a track record of growth and sustainability through business operations and cash flow. Current dividend 2.6% versus 1.5% for the S&P 500.
Top 5 Holdings: MSFT, APPL, DIS, SBUX, and SPG
Our investment process operates within a collaborative, team-based environment, and all strategy decisions are made through our investment committee, which meets on a daily basis. While the holdings within each of our equity strategies may vary based on objective, the process for idea generation, research and analysis, and trade execution is consistent across all of our equity strategies.
At the core of all our portfolio holdings is valuation. Valuation can be determined by relative value, fundamental valuation, or a combination of both. We do not view valuation as a static measure of some ratio, but we are looking at the size and scope of the addressable market. When evaluating a security, we may ask:
When constructing a portfolio, we also pay close attention to position sizing. Each position is given a target size range that is dictated by both conviction and volatility of the security. At Winthrop, we view our portfolios with a “risk allocation” lens, versus merely sector allocation. If a security has a higher volatility, it will have a reduced potential position size. In addition, we are careful to invest in a position over a given time period, never investing in the full target amount at once.
Growth stocks were the driver of the market in 2020. While the COVID-19 pandemic greatly decreased the earnings of many companies, behavioral shifts due to social distancing actually caused revenue acceleration in a group of primarily technology stocks. So far in 2021, we have seen the opposite. There has been a strong rotation away from technology and into more value-oriented companies. To illustrate this rotation, the Focused Growth strategy returned 42% in 2020, but it is currently lagging the S&P 500 year-to-date in 2021. Regional and money center banks have been the largest contributors to performance so far this year. A steeper yield curve and higher long-end rates have led to the strong performance in banks. Conversely, semi-conductor stocks have been the biggest detractor of performance. Supply constraints have reduced the volume of shipments, while medium-term contracts usually used in the semi-conductor space have hampered price increases.
We believe the crossroads of continued fiscal stimulus and a well-adopted vaccine will lead to substantial economic growth in 2021. This will continue to drive asset prices but could also lead to higher interest rates. Higher interest rates are the quickest way to choke off economic growth; therefore, we believe the Federal Reserve will continue to take measures to stabilize rates across the entire curve. Due to this, we believe the rotation from growth into value has a relatively short life. Our current high conviction stock ideas, therefore, tend to favor technology-based stocks.
Microsoft continues to have the highest growth potential in the cloud infrastructure space. The adoption of the Microsoft Teams application in the workplace and subsequent cross-selling potential has grown due to the COVID-19 pandemic, and we believe work-from-home trends are here to stay.
PayPal has benefited from the shift to a centralized wallet and peer-to-peer transactions through Venmo. We believe the adoption rate across retail to use PayPal will continue to accelerate. In addition, thepandemic has further reduced the acceptance of cash transactions. These shifts will all continue to drive PayPal revenue growth.
Tencent is one of the largest and most-used tech companies that is typically not on many people’s radar. Their applications have more usage than most large U.S. tech firms. Tencent’s diversified portfolio has shielded it from the grip of the Chinese government, and we believe their user base has high potential to grow further outside of China.
Amazon will continue to dominate both cloud computing and the online retail segment, despite a growing competitive environment. While AWS growth has continually slowed, it is still strong. We believe Amazon will continue to invest in a productive way that will drive growth in new segment.
Simon Property Group is our best idea outside of technology. We do not believe the mall is dead. While it may take on an evolving form, we see the vaccine as a driver of pent-up customers looking to get out. Online purchases still make up only a minority of the retail segment, and as consumers become more comfortable with going out, in-person shopping could once again become a social event.
This report is published solely for informational purposes and is not to be construed as specific tax, legal or investment advice. Views should not be considered a recommendation to buy or sell nor should they be relied upon as investment advice. It does not constitute a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual investors. Information contained in this report is current as of the date of publication and has been obtained from third party sources believed to be reliable. WCM does not warrant or make any representation regarding the use or results of the information contained herein in terms of its correctness, accuracy, timeliness, reliability, or otherwise, and does not accept any responsibility for any loss or damage that results from its use. You should assume that Winthrop Capital Management has a financial interest in one or more of the positions discussed. Past performance is not a guide to future performance, future returns are not guaranteed, and a loss of original capital may occur. Winthrop Capital Management has no obligation to provide recipients hereof with updates or changes to such data.
© 2021 Winthrop Capital Management
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