Investment Objectives
The US Large Cap Aggressive Growth SMA strategy seeks to create wealth through capital appreciation.
To meet this objective, the team will focus on:
- Building a diversified portfolio of the most innovative large-cap companies.
- Acting like owners of a business, maintaining a long-term perspective, and being very reluctant to sell.
- Striving to earn acceptable returns on a rolling three-year basis, as measured by gross returns at or above benchmark levels, upside capture of at least 120%, and upside/downside capture ratio greater than 1:1.
Portfolio Managers
Who should invest?
The Large Cap Aggressive Growth SMA strategy is for investors who want a portfolio of businesses that are looking to move the world forward, and who can handle the extra volatility inherent in this strategy. These companies are creating new business models, designing new products and services, and developing new technologies that are changing the status quo. To make the most of a portfolio like this, investors need to have a long-term mindset, as some of the innovations may take as much as a decade to truly take hold in the marketplace.
Philosophy and Strategy
The Large Cap Aggressive Growth SMA investing philosophy hinges on three key points:
- Invest in innovative companies in important emerging industries.
- Invest in strong management teams who are pursuing large market opportunities.
- Invest in businesses that are building sustainable competitive advantages.
Entrepreneurs are turning new ideas into new companies every day. Some of those companies move from the private markets to the public markets. Others simply fade away. The team looks for the companies that are pushing forward in important new industries and have the staying power to generate outsized returns over long periods. Fortunately, with the pace of technological change, new industries and new companies pop 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? Most importantly, we want to invest alongside managers who we believe are building businesses that are solving big problems with unique solutions. Where relevant, we also assess who has invested in the company in its early stages: venture capitalists, other entrepreneurs, fund managers, etc.
We prefer companies working to build a sustainable competitive advantage. After all, there are probably 10 more entrepreneurs looking to go after the same markets with innovative solutions themselves (which gives us additional investment opportunities). We use several different analytical tools to determine if a company is building an advantage and will likely allocate more capital to those that are.
Once we find a truly great company, we are willing to pay a reasonable price for its stock. And we want to be very reluctant to sell. Over time, history has shown that wonderful businesses with great management teams and cultures of success have had the capacity to create tremendous amounts of value (even sometimes in the presence of volatility and large drawdowns). 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 because the investing thesis has changed for the worse or we have found an even more compelling idea.
Portfolio Management Process
Portfolio Construction
The Large Cap Aggressive Growth SMA strategy will generally look to own 15-30 stocks at any given time, depending on the opportunities available in the marketplace. Within that range, the highest confidence 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 allocation limits, preferring to let our winners run, the team continuously monitors position sizes to make sure the risk/reward trade off remains favorable. The majority of the portfolio will be concentrated in U.S. domestic equities, but we can allocate up to 25% of the portfolio to high quality growth opportunities headquartered in other countries and traded on U.S. exchanges.
Investment Selection
We select companies for the portfolio using fundamental research, with specific attention paid to the factors in the portfolio’s goals and objectives. Although we do valuation work, it is not the dominant factor in our investment decisions and traditional valuation techniques may not be a key determinant for younger companies. The team uses a combination of qualitative and quantitative factors to determine the risk/reward profile of each company, understanding that every investment is the probability weighting of numerous potential outcomes.
Position Sizing
The team prefers to allocate the most capital to our best ideas, defined by the combination of the qualitative and quantitative factors that lead to an assessment of the risk and reward associated with each investment idea. We have loose guidelines around position sizes, focusing instead on the overall risk and reward of the portfolio, with a willingness to make aggressive decisions.
Position Management
We expect the Large Cap Aggressive Growth SMA strategy 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 will succeed. We will not hesitate to sell a stock if the company is struggling to capture a large portion of the market and/or 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 to the portfolio. The most likely actions to be taken 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 new positions to the portfolio.
- Selling entire positions of companies that no longer have prospects as attractive as other opportunities.
We monitor each company’s financial statements and stock price for indications that the company’s competitive advantage is truly taking hold. If we see positive signs, we may add to our winners, even at higher prices than we previously paid.
We expect to be close to fully invested at all times.
Investment Risks
The portfolio is designed with an objective of achieving Upside Capture of at least 120% in an upward-moving market, on the way to market-beating performance across longer periods. This approach may lead to higher-than-benchmark volatility in both good times and bad, with times of significant underperformance. We willingly accept this portfolio risk as an unavoidable trade-off to reap the potential benefits of long-term investments in superior companies.
Aside from this volatility, the largest risk is that our analysis of our holdings is incorrect, leading to longer-term sustained underperformance. The team strives to control this risk via fundamental analysis of each company. The more we understand how a business is changing the game in its industry, how its management team is pursuing new opportunities, and how it is building a competitive advantage, we believe the less likely it is that our investments should lose money over the long term. Valuation does not play a significant role in the risk control process.
With a focused portfolio, investments could concentrate in just a few sectors or industries.
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 client 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.