Edgewood Growth Fund Shareholder Letter - April 30, 2016
Your Fund’s performance was -4.19% (Institutional Shares) and -4.41% (Retail Shares) for the six months ended April 30, 2016. The performance of the S&P 500 Growth Index was -2.13%, and the S&P 500 Index was +0.43% in the same period of time. Looking at the trailing twelve months, the Fund appreciated by 4.52% (Institutional Shares) and 4.07% (Retail Shares). In the same trailing twelve month period, the S&P 500 Growth Index appreciated by 1.73% and the S&P 500 Index grew by 1.21%.
Over the last six months, the top portfolio contributors were Facebook Inc., S&P Global Inc. (previously McGraw Hill Financial), Intuitive Surgical Inc., Equinix Inc. and Amazon.Com Inc. Facebook is a fairly new holding for the Fund and the business is outperforming most people’s expectations. We think there is a long runway of growth as the company continues to transform the way the world communicates. S&P Global has acted well as investors have observed in the two most recent quarters that the business is much more resilient than financial market volatility would suggest. Intuitive Surgical continues to benefit from further adoption of robotic surgery and the company’s procedure growth in the last quarter was further evidence of this. Equinix is benefitting from the continued ramp in enterprise cloud spending which is driving faster sales and profit growth than many had anticipated. Finally, Amazon continues to expand sales and especially profit margin at an exceptional pace.
The top portfolio detractors over the last six months have been Alliance Data Systems Corp., Celgene Corp., Gilead Sciences Inc., Cognizant Technology Solutions and ARM Holdings PLC. In the case of Alliance Data Systems, the investment community has turned more bearish on the credit quality of American consumer over the past six months. As a result ADS stock has suffered. Despite evidence suggesting stable credit conditions, investors remain skeptical of companies exposed to consumer credit and continue to be on the sidelines as it relates to ADS. Both Celgene and Gilead have been affected over the last six months by the general weakness in biopharma stock prices. Much of this stems from a fear of political backlash to pricing issues in the industry that were highlighted by the excessive behavior of Valeant Pharmaceuticals and Turing Pharmaceuticals.
Cognizant Technology Solutions underperformed because of a pause in projects from their large money center bank customers during the market dislocation early this year. On their most recent earnings call, the company specifically commented that the pause has abated. Finally, ARM Holdings traded down in concert with global smart phone growth slowing. That said we are pleased with the company’s results and remain impressed with their diversified industry exposure apart from smart phones.
We still believe the US economy will continue to grow, albeit at a muted pace. We think this environment should be good for growth stocks. If we can continue to own companies that grow their earnings per share markedly faster than the overall market and economy, and we can buy the shares at attractive prices, appreciation should follow long term. We know that share prices will be volatile over the shorter term, as they were earlier in 2016, but we remain convinced in the favorable long term prospects of this portfolio.
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.