As of September 13, 2020
A Conversation Across the Growth Spectrum…
Harbor has the benefit of sharing thoughts and perspectives with a diverse set of asset management partners around the globe – up and down the cap spectrum, across different styles or geographies – we can go anywhere.
Our focus this week is growth, and more specifically the recent technology sell-off and volatility we just witnessed. We’re fortunate to be joined in this virtual conversation by two tremendously experienced growth investors: Will Muggia, President, CEO and CIO at Westfield Capital Management Company and Blair Boyer, Managing Director & Co-Head of Large Cap Growth Equity at Jennison Associates LLC where we’ll explore what happened.
Kristof Gleich (KG): After a difficult first quarter, markets were fairly calm over the summer, at least more linear in nature. Then volatility suddenly spiked again, what happened? Was this sell off more technical or fundamentally driven? What changed?
Blair Boyer (BB): Markets have been volatile throughout 2020 for various reasons. Stocks peaked at new highs in February, then dropped more than 30% in 25 trading days. Between the March 20 trough and another new high last week, the S&P 500 rose about 55%. In the past few trading days, it’s given back roughly 7%, which is modest in that context. We think it’s good to keep things in perspective. Since 2009, the S&P 500 has fallen by 7% 20 times, so declines of this scale aren’t really that unusual.
We don’t see any fundamental reason for this sell-off. It’s been confined primarily to large cap tech stocks and a group of smaller, faster growers that enjoy some of the tech enabled benefits of their larger peers. These stocks have made major positive moves over the last several months, so, we believe, the sell-off is most likely the result of normal profit-taking.
Will Muggia (WM): The most recent sell-off was driven by corrections within technology stocks, high volatility and high momentum stocks. We believe it was mostly technical in nature as valuations had been stretched to extremes, particularly with the largest Technology names. In addition, large cap Tech and work from home beneficiaries have led the last several months. To the extent that we have a successful vaccine, we believe the market will broaden to other sectors which could be healthy for the overall stock market.
KG: Although relatively short-lived, the debate will most likely flare up around this being the end of growth investing and the highly anticipated move to the rotation to value. Your thoughts?
BB: That debate has been going on for quite some time particularly after the dramatic and lengthy outperformance of growth versus value. Thinking of reversion to the mean, some argue that since growth has had a very long run of outperformance, it’s time to allocate to value. This does not address why growth stocks have done so well and why growth’s advantages may be more durable. Growth companies have done well because their growth rates of revenue, cash flow, and earnings have consistently outpaced those of value companies for the past decade.
We think that these fundamental drivers will continue to favor growth stocks over our prospective investment time horizon. We’re in a slower-growth environment with low interest rates — “lower for longer.” COVID-19 and the monetary policy response to the pandemic have extended the outlook for this interest rate regime. In periods like this, when growth is scarce, we expect companies that can exhibit consistently faster growth than the overall investable universe will be rewarded.
We believe we’re in the early stages of a paradigm shift in how companies enable growth. Companies need to be innovative in how they deliver their products and services. They need to adapt to improvements in technology, implement productivity tools, and connect with customers globally more efficiently. Companies that fail to adapt will either not survive or perform substandardly.
The impressive performance of many growth stocks since March also reflects indications that the digital transformation of the global economy is accelerating meaningfully in the COVID-19 environment, as social-distancing and shelter-in-place directives necessitated by the pandemic have underscored the value, utility, and resilience of ecommerce, digitally enabled payments, cloud computing, and streaming business models. The market’s bifurcation between winners and losers in a COVID/post-COVID environment has lifted advantaged companies to records, while beleaguered businesses with bleak prospects for recovery have seen equity values atrophy.
WM: In our view, truly disruptive companies and innovators can create so much value. Over the long-term we believe they can add value in both growth and value markets. Currently, we believe there are a large amount of broken value companies, so we are less focused on whether growth or value leads. We believe the biggest value creation is likely to happen with truly disruptive companies that can create new products or markets that result in massive sales growth.
KG: As a long-term, fundamentally oriented active manager focused on secular winners, how do you navigate bouts of market and/or specific sector volatility?
BB: Markets are volatile by their nature and are marked by heightened levels of volatility from time to time. As fundamental investors, we examine company and industry prospects over short and long terms, working to understand how industries and businesses will change over time. Our goal is to identify market-leading companies that create economic value through unique business models and the development of long-duration competitive advantages, and that have well-above-average growth rates. Many factors, including company fundamentals, macroeconomic conditions, and market risk tolerance, produce variability in the way investors price securities in the short term. We constantly assess if and how these factors affect our investment thesis and the long-term value of our holdings.
WM: We have been focused on staying disciplined and trimming/selling winners when their price targets are hit and there is no longer an attractive risk/reward. In bouts of volatility, we get our “wish lists” ready and look to buy our favorite long-term growth companies at attractive valuations.
KG: What advice would you offer to clients who are trying to thoughtfully navigate more frequent bouts of increased volatility?
BB: Focus on company fundamentals. Keep your long-term objectives in sight.
WM: With interest rates pegged at zero, inflation likely to show up in the years ahead, and COVID and the economy likely to get better from here, we believe stocks are the only game in town. Historically, you want to buy during times of fear and volatility, not when the stock market is up and no one is fearful. For context, there is $4.2T in cash on the sidelines right now, suggesting there is plenty of fear in the market.
KG: Thanks for the discussion. In summary it seems fair to conclude that this recent volatility is par for the course in investing – we should expect bouts of volatility like this recent one. On the surface it feels more technical rather than fundamental and seems some investors are taking some profits after a terrific run. Whether or not value or growth leads from here – one thing is clear: disruption and the impact on businesses, supply chains and entire industries and markets is here to stay. Additionally, COVID-19 has accelerated disruption in some business and industries. As always, having a long-term game plan, and the discipline to stick to that game plan while not overreacting to short-term volatility has the most potential to continue to be a successful strategy.
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Past performance is no guarantee of future results.
The information shown relates to the past. Past performance is not a guide to the future. The value of an investment can go down as well as up. Investing involves risks including loss of principal.
The views expressed herein are those of Harbor Capital Advisors, Inc., Westfield Capital Management, LP, and Jennison Associates, LLC investment professionals at the time the comments were made. They may not be reflective of their current opinions, are subject to change without prior notice, and should not be considered investment advice.
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