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August 2023

Core Equity – Staying True to Our Approach to Thematic Investing

Key Points

  • Portfolio positioned for mild recession
  • Disciplined and fundamentally driven investment process drives stock selection
  • Focused on high quality, attractively valued companies and key secular themes

In the more than 10 years we’ve been managing the Core Equity Strategy, the foundational elements to our success have been identifying secular themes that can drive above average growth potential, and identifying high quality companies with strong fundamentals selling at reasonable valuations that we can buy and hold for the long term to minimize turnover and capital gains. 

Balancing Secular Growth with Cyclical Pressures

Because we continue to anticipate a mild recession, we have been focusing on stocks with the right blends of defense and offense, which come from companies with strong franchises and management teams that can manage their way successfully through the recession, and come out the other side with above average growth prospects. At the thematic level, we have the portfolio positioned with a similar perspective. On the defensive side, we have been overweight healthcare innovators and durable consumer themes. On the offensive side, we have the digital revolution and clean climate theme.

Healthcare Innovators: We own Edward Lifesciences (EW) and HCA Healthcare (HCA), both of which benefit from post pandemic, pent-up demand for elective surgeries. UnitedHealth Group (UNH) is a digital leader in the healthcare insurance business, and a high-quality defensive name that has delivered excellent compounding return over many years. 

Durable Consumer Franchises: Costco (COST), WalMart (WMT), McDonald’s (MCD), and PepsiCo PEP) are industry leaders and tend to outperform during recession. We also own Home Depot (HD) on the cyclical side, with secular growth driven by a housing shortage and aging housing stock in the US.

Digital revolution: Despite the AI frenzy sending many prices of many speculative tech stocks soaring, our holdings are rooted by solid balance sheets and strong profitability. Microsoft (MSFT) is one of the largest holdings andhas been prominently featured on the AI stage with Chat-GPT partnership. We also own Equinix (EQIX), a premier data center operator, connecting corporate databases to public and private AI cloud networks, and Adobe (ADBE), a software leader using AI in creative content generation. Our semiconductor holdings, ASML and NXPI, are also well positioned to benefit from AI and industrial automation.

Clean climate: All around the world, governments are fighting global warming by limiting consumption of fossil fuel, and building renewable energy infrastructures. Financial incentives and regulatory requirements are put in place to accelerate those initiatives. We own Quanta Services (PWR) and Trane Technologies (TT), serving to reduce emission and carbon footprints, and Linde (LIN), a leading industrial gas company and a pioneer in the blue hydrogen business.

Chart 1: Thematic Research Focus

*Some stocks are included in more than one theme.

Why Valuation Matters

A good company does not immediately translate into a good stock to own. We have always used a disciplined approach to assess a company’s earning power relative to the price of the stock. One example is Microsoft (MSFT).  Valued at 73x P/E at the end of 1999, its multiple subsequently collapsed to 9x  after the internet bubble burst.  If an investor had purchased the stock at the top, it would have taken sixteen years to get back to breakeven.

Chart 2: Microsoft
Forward Price to Earnings Multiple 
 Source: Bloomberg, as of June 2023. 

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