Edgewood Growth Fund Shareholder Letter - October 31, 2017
We are pleased to report that the Fund's performance for the trailing twelve months ended October 31, 2017 was +33.75% (Institutional Shares) and +33.17% (Retail Shares). The performance of the S&P 500 Growth Index (Total Return including dividends) was +26.51% and the S&P 500 Index (Total Return including dividends) was +23.63% in the same period of time. For the six month period ending October 31, 2017, the Fund's performance was +13.19% (Institutional Shares) and +12.91% (Retail Shares). In the same six month period, the S&P 500 Growth Index (TR) was +11.38% and the S&P 500 Index (TR) was +9.10%.
Over the last twelve months, the top portfolio contributors were Nvidia Corp., PayPal Holdings Inc., Illumina Inc., Amazon.com Inc., and Intuitive Surgical Inc. Nvidia is the beneficiary of the rapid growth in online gaming and data centers. The increasing penetration of artificial intelligence in many different business applications has expanded the company's available market and has driven business performance beyond expectations. PayPal is right in the middle of the growing worldwide electronic / mobile payments revolution. This has driven sustained volume growth and consumer engagement. Illumina's new NovaSeq machine expands the company's already dominant competitive position in the rapidly growing and evolving gene sequencing market. Amazon continues to benefit from consumer preferences shifting towards e-commerce, while Amazon Web Services is executing strongly as computing continues to shift to the cloud. Both core businesses are performing extremely well and we are excited about the potential for Whole Foods to expand market share. Finally, Intuitive Surgical has accelerated procedure growth and the number of different surgeries done robotically. With a strong market share and well accepted new products, we think the company has a long way to go.
The top five portfolio detractors in the twelve months ended October 31, 2017 were Allergan PLC, Celgene Corp., Ecolab Inc., Nike Inc., and Alliance Data Systems Corp. Allergan has been under pressure as a result of several drugs losing their patents faster than we had expected. In addition, healthcare stocks have been quite out of favor. On the positive side, the company has a strong core business and pipeline that we expect will generate healthy profit growth as we get past these issues. Celgene had a major pipeline drug fail in Phase III and subsequently somewhat lowered its earnings guidance. As a result there is a great deal of concern about the future that was not there a short time ago. We think Celgene will be able to navigate the current uncertainty and continue to provide effective treatments to patients. Ecolab has somewhat underperformed our expectations primarily due to weakness in its energy-related business. We think the company is poised to accelerate sales and earnings growth next year. Nike has been confronting several challenges at the same time. The shift towards direct to consumer has accelerated, Adidas has had good product momentum and Nike had a few subpar product launches essentially all at the same time. The company is rapidly addressing these issues and we hope to see trends improve going forward. Finally, we have been expecting an acceleration at Alliance Data Systems and that has been pushed out to 2018 to the disappointment of investors. One of the business lines, Epsilon, has disappointed so far but we continue to think momentum will begin to improve.
Since the US election a year ago, economic growth and corporate earnings have been a touch better than we thought. Foreign currency is beginning to abate as a headwind and international growth also appears just a bit better. We see these factors affecting our companies as well as corporate profits in general. We do not want to make too much of a slightly improved economic environment, but just to take note. In the meantime, as always, we are looking to have a portfolio full of companies delivering strong double digit growth, which most are currently doing. This has been, and we think should continue to be, the driver of long term performance. There will be bumps along the way, but we remain optimistic long term.
Edgewood Management LLC
This material represents the manager's assessment of the portfolio and market environment at a specific point in time and should not be relied upon by the reader as research or investment advice. Holdings are subject to change. Current and future holdings are subject to risk.
Mutual fund investing involves risk, including the loss of principal. The Edgewood Growth Fund is a non-diversified fund. There can be no assurance that the Fund will achieve its stated objectives.
Definition of Comparative Indices
The S&P 500 Growth Index is a market capitalization weighted index consisting of those stocks within the S&P 500 Index that exhibit strong growth characteristics.
The S&P 500 Index consists of 500 stocks chosen for market size, liquidity, and industry group representation. It is a market-value weighted index (stock price times number of shares outstanding), with each stock's weight in the Index proportionate to its market value. The "S&P 500" is one of the most widely used benchmarks of U.S. equity performance.