Edgewood Growth Fund Shareholder Letter - October 31, 2015
The Fund's performance was +11.37% (Institutional Shares) and +10.92% (Retail Shares) for the trailing twelve months ended October 31, 2015. The performance of the S&P 500 Growth Index was +9.23%, and the S&P 500 Total Return Index (including dividends) was +5.20% in the same period of time. Looking at the trailing six-month period ended October 31, 2015, the Fund's performance was +9.10% (Institutional Shares) and +8.87% (Retail Shares). In the same six-month period, the performance of the S&P 500 Growth Index was +3.95% and the S&P 500 Total Return Index was +0.77%.
Over the past twelve months, the top five portfolio contributors were Amazon.com Inc., Cognizant Technology Solutions, Equinix Inc., Visa Inc. and Alphabet Inc. Amazon improved sales and margins since we wrote about it a year ago when it was highlighted as a portfolio detractor. We said at that time that we believed operating margins would improve over the long term, and frankly it is happening faster than we thought a year ago. Our analysis leads us to conclude that the company is extremely well positioned for continued growth in the retail offering as well as Amazon Web Services ("AWS"). The recent breakout of the AWS financials confirmed to us the impressive profitability and growth of this segment. Cognizant continued to execute their growth plan, and if anything we feel even better about their long-term positioning given their entry into the healthcare vertical. Equinix had been under a bit of a cloud due to Wall Street concerns about the growth rate and market position. The company proved those worries to be exaggerated by showing very solid growth and profitability. Visa continued to convert the global population from cash to electronic payments at a rapid clip. In addition, the company recently announced a merger with Visa Europe, which we think will be accretive to long-term shareholder value. Finally, Alphabet stock has also performed favorably over the course of 2015 as the company's mobile Google Search and YouTube businesses have exceeded expectations. The recent hiring of Ruth Porat as CFO and announcement to restructure the company's reporting segments beginning in the fourth quarter of 2015 have also served as boons for the stock. Going forward, we expect that Alphabet's strong operating momentum, newly announced share buyback authorization and revamped financial reporting structure to be key catalysts for the company.
The top five portfolio detractors for the past twelve months were Stratasys Ltd., Illumina Inc., FMC Technologies Inc., Twenty-First Century Fox and IHS Inc. Stratasys addresses the 3D printing market, which has slowed dramatically from what we had forecast. We are not entirely sure about all the reasons for the slowdown (and neither was management), and, as a result, we exited the position. Illumina serves the rapidly growing gene sequencing market. There has been a slight slowing in their business recently, which translated into an outsized correction in the stock price. We added to the position. FMC Technologies operates in the deep sea oil service business. While the company is an excellent operator, the drop in oil prices hurt the shares, and we sold them because of our inability to predict the price of oil. Twenty-First Century Fox continued to take a bit longer for fundamentals to dramatically improve, but we still think they will. We continue to hold the shares and hope that 2016 will be the year our clients get paid for their patience. We believe the stage is set for higher cash flow generation, reduced capital expenditures and rising affiliate fees for their live sports programming. Finally IHS has been a bit sluggish for one primary reason. About a third of the business derives from the energy sector which has seen dramatic commodity price declines that have affected IHS client subscription budgets. Despite that, the company was very profitable and has grown at a solid rate. We remain shareholders of IHS.
We have believed for some time that the US economy was in a sustained period of muted but positive economic growth. That opinion actually applies to worldwide growth as well. Our guess is that the environment will continue. Meanwhile, the companies in the Fund portfolio are forecasted to grow earnings per share in a range of approximately 15-20% per year, unchanged from our past writing. We believe that the earnings growth of the companies has been the driver of our performance, and we believe it will continue to be the driving element. In terms of interest rates, the longest drum roll in Federal Reserve (Fed) history is likely nearing an end with Fed funds moving from the stated "zero" policy to something closer to 25 basis points. This potential hike could come in December and will be the beginning of a very slow and gradual glide path to higher rates. But as Yogi Berra said "it is very difficult to make predictions, especially about the future" so the exact "lift off" is still uncertain.
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.
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.
Mutual fund investing involves risk, including loss of principal. The Edgewood Growth Fund is a non-diversified fund.