Philosophy and Strategy
The Large Cap Aggressive Growth portfolio’s investing philosophy hinges on three key beliefs:
- Investing in innovative companies in crucial emerging industries.
- Investing in strong management teams who are pursuing large markets.
- Investing in businesses that are building long-term, sustainable competitive advantages.
Entrepreneurs are turning bold, new ideas into new companies every day. Some of those companies move from the private markets to the public markets. Many of them simply fade away. The team looks for the companies that are pushing forward important new industries. Take social media, for example. Ten years ago, it was really just a dream. But today, social media is having a tremendous impact on how people manage their lives, their businesses, and even their careers. We want to explore all of the investment opportunities available in emerging industries. And fortunately, with the pace of technological change, new industries are popping up almost overnight.
In order to assess the quality of the management team, we start with the history of the executives. What have they done in the past? How did they start the company they manage today? Who has invested in the company, be it venture capitalists or fund managers? Most importantly, we want managers to be thinking big. Finding little niches can be lucrative. But we prefer to invest in leaders who are building businesses that go after big problems with big solutions. It may take a while for some of these companies to ultimately make big impacts, but the payoffs for investors can be tremendous.
Along the way, it’s vital for a company to build a sustainable competitive advantage. After all, there are probably 10 more entrepreneurs looking to go after the same markets with innovative solutions (which of course gives us additional investment opportunities). So we use a number of different analytical tools to determine if a company is actually building an advantage. And we use the company’s financial statements and stock price as indicators of whether that advantage is truly taking hold. If we see positive signs, we will not be reluctant to add to our winners, even at higher prices than we previously paid for their stocks.
Once we find a truly great company, we are willing to pay a reasonable price, as opposed to waiting for a bargain price, for its stock. And we’ll be very reluctant to sell. History has shown that wonderful businesses with great management teams and cultures of success have an affinity for creating tremendous amounts of value. By acting like business owners instead of stock traders, we expect the portfolio to have very low turnover. The most likely reasons for selling a stock out of the portfolio will be that the investing thesis has changed for the worse or we have found an even more compelling idea.
Portfolio Management Process
The portfolio will look to own 15-30 stocks at any given time, depending on the opportunities available in the marketplace. Within that range, the best ideas will receive larger allocations. The idea is to find a balance of concentration and diversification that will give us the best opportunity to outperform the market over the long run. Although we don't have position limits, preferring to let our winners run, the team continuously monitors position concentration to make sure the risk/reward trade off remains favorable.
We select companies for the portfolio using fundamental research, with specific attention paid to the factors in the portfolio’s Objective & Goals. Although we do valuation work, it is not the dominant factor in our investment decision, and traditional valuation techniques may not be applicable for many of the younger companies that we’ll be evaluating. As such, we may use tools like Real Options to help us assess the potential reward of an investment. In addition, we require a higher investment return upside — typically on the order of 15% or more. The team uses a combination of these qualitative and quantitative factors to determine the risk/reward profile of each company.
The team prefers to allocate the most capital to our best ideas, defined by the combination of the qualitative and quantitative factors above that lead to an assessment of the risk and reward associated with each investment idea. As such, we have set loose guidelines around position sizes:
|Low Reward||High Reward|
Actual allocations can vary, but we will not initiate a position less than 2%.
We expect the portfolio to have low turnover. Once we find a business that meets the aforementioned criteria, we would prefer to hold that position forever, if possible. However, we understand that not every disruptive/innovative business actually "makes it." So we will not hesitate to sell a stock if the company is showing signs that it will not capture a large portion of the market and/or is unable to build a sustainable advantage.
We will make adjustments to the portfolio over time, as new information about each individual company becomes available. But we do not expect to make frequent, significant changes. The most likely actions to be taken over time are:
- Purchasing additional shares of a stock already in the portfolio, based on improving risk/reward characteristics.
- Selling portions of current positions in order to add a new position to the portfolio.
- Selling entire positions of companies that are not showing the right signs of progress and investing in new ideas with a better risk/reward profile.
Finally, we expect to be close to fully invested at all times. The team will hold a small cash position (2%-4%) at all times in order to be ready for opportunities that arise in the marketplace.
The value of investments in the Large Cap Aggressive Growth Strategy may increase or decrease, which will cause the value of the investor's portfolio to increase or decrease. Investors may lose money on their investment and there can be no assurance that the strategy will achieve its investment objective and goals.
The principal risks inherent in this strategy are:
The stock of any company may not perform as well as expected, and may lose value, because of factors related to the company, including adverse developments regarding the company's business, poor management decisions, or changes in the company's industry or popularity of its goods and services. In the event a company becomes insolvent, stock holders will generally have lowest priority among owners of that company's obligations as to the distribution of the company's assets. Stocks may also be affected by general market and economic factors, even when their companies' respective business fundamentals are unchanged.
Please see Appendix B to our Investment Advisory Agreement for a discussion of additional risk associated with this strategy. A link to the Investment Advisory Agreement is provided at the bottom of this page.
Each Personal Portfolio is subject to an account minimum, which varies based on the strategies included in the portfolio. Motley Fool Wealth Management retains the right to revise or modify portfolios and strategies if it believes such modifications would be in the best interests of its clients, and we may modify allocations within a client's account subject to the constraints of each client's current risk score and objective. Clients should be aware that their individual account results may not exactly match the performance of the Model Portfolios.