Download TCW Concentrated Core (Large Cap Growth)

MANAGED ACCOUNTS DIVISION
TCW Concentrated Core (Large Cap Growth)
SECOND QUARTER 2017 | INFOFLASH
Philosophy: A highly-focused approach primarily targeting
top mid- to large-cap companies with strong and enduring
business models. An ac­
tive strategy utilizing proprietary
fundamental research focused on identifying companies
with improving operating prospects.
Key Issues
• Despite a dearth of progress in Washington related to President Trump’s ambitious agenda, the
stock market continued its march higher as economic data continued to firm and consumer
confidence remained on solid ground. The second quarter began with a sluggish nonfarm payroll
print (+98k vs. +180k consensus) and a disappointing initial U.S. GDP print of +0.7% (later
revised upward to +1.2%) but the May employment report included news that the unemployment
rate fell to a 16-year low (4.3%). The National Federation of Independent Business (NFIB)
Small Business Optimism Index improved to 114.5 in May and CEOs remain confident that
the new administration will eventually achieve some form of tax reform. While nonresidential
construction indicators remain somewhat dormant, the national manufacturing Purchasing
Managers’ Index remains in expansionary territory. Against this backdrop, the Fed appears intent
on “normalization” (something we welcome) and the Fed raised short-term interest rates by
25bps in June and issued guidance regarding its plans to reduce the size of its ~$4.5T balance
sheet. As we start the second half of 2017, focus turns to corporate quarterly earnings and
whether the baton handoff from monetary to fiscal stimulus can be accomplished via tax reform
and pro-growth industrial policies as potential key drivers of the U.S. equity markets.
• Including the contribution of sector allocation and security selection, our information technology
and consumer discretionary weightings helped relative results most and our healthcare and
industrials weightings hurt relative results most. Positive security selection, particularly in the
information technology, real estate and consumer discretionary sectors, drove performance.
• We believe the current low growth environment is a direct result of a supply shock due to excess
regulation and the harmful side effects of years of quantitative easing. This radically extended
period of cheap money, in concert with burdensome regulations, created a disincentive for our
business leaders to take real financial risks. Perhaps it is not surprising that with President
Trump’s unexpected victory last November the market traded as if the new regime might be able
to quickly enact meaningful tax reform and rollback unfriendly regulations. Unfortunately, the
political calculus out of Washington continues to change by the day, making the “baton handoff” from monetary policy to fiscal policy less clear as a sustaining force in the business cycle.
• As we wait on Washington and the Fed, economic data has generally been supportive of the
market advance. The U.S. economy appears close to full employment, consumer confidence is
healthy, and credit spreads remain tight. This has been a boon for risk assets, and while multiple
expansion has driven much of the current broader market rally, our portfolio has not benefited
to the same degree. In fact, despite the strong absolute and relative performance delivered by
the portfolio thus far in 2017, the portfolio trades at a similar 1-year forward PEG ratio basis as
it did entering the calendar year.
• Maintaining our balanced view, we continue to expect increasing bouts of volatility during
the second half of the year and would consider any turbulence a healthy reordering of quality
equities that is long overdue following years of quantitative easing. In the interim, we will remain
resolutely focused on maintaining our exposure to companies with strong business models and
attractive end markets that we believe can endure and thrive over the long term.
Top Ten Holdings
AS OF JUNE 30, 2017
Name % of Portfolio
1. Alphabet, Inc.
6.7
2. Facebook, Inc.
5.7
3. Visa Inc.
5.3
4. American Tower Corp.
5.1
5. Amazon.com, Inc.
4.9
6. salesforce.com, inc.
4.8
7. Celgene Corporation
4.8
8. Chubb Limited
4.1
9. The Priceline Group Inc.
4.0
10. Adobe Systems Incorporated 3.9
S ource: TCW. Based on a managed account model portfolio. Portfolio
characteristics and holdings are subject to change at any time. It
should not be assumed that an investment in the securities listed was, or
will be, profitable.
This publication is for general information purposes only and is not intended
to offer investment advice or be the basis for an investment decision. Nothing
in this document constitutes an offer to sell or the solicitation of an offer to
buy securities. Investing in any strategy has risks. An account is subject to
price volatility. The value of an account’s portfolio will change as the prices
of its investments go up or down. Because this is a concentrated strategy,
it may have greater price volatility than a more diversified account. Equity
investments entail equity risk and price volatility risk. The value of stocks
and other equity securities will change based on changes in a company’s
financial condition and in overall market and economic conditions. Before
embarking on the described investment program, an investor should carefully
consider the risks and suitability of the described strategy based on their own
investment objectives and financial position. The strategy will not invest in
initial public offerings. The processes described herein are illustrative only
and are subject to change. The information contained herein may include
estimates, projections and other “forward-looking statements.” Actual events
may differ substantially from those presented herein. TCW assumes no duty
to update any such forward-looking statements or any other information
or opinions in this document. TCW makes no representation that future
investment performance will conform to past performance and it should
never be assumed that past performance foretells future performance.
TCW’s portfolio managers make investment decisions based on various
sources of information and analysis and are not necessarily based on the
economic information set forth herein. The index is not available for direct
investment; therefore its performance does not reflect a reduction for fees or
expenses incurred in managing a portfolio. The securities in the index may be
substantially different from those in the strategy.
Any opinions expressed are current only as of the time made; are subject to
change without notice; are solely those of the author and do not represent
the views of TCW as a firm or of any other portfolio manager or employee of
TCW. TCW assumes no duty to update any such statements. Any holdings of
a particular company or security discussed herein are under periodic review by
the author and are subject to change at any time, without notice. In addition,
TCW manages a number of separate strategies and portfolio managers
in those strategies may have differing views or analysis with respect to a
particular company, security or the economy than the views expressed herein.
INFOFLASH
TCW Concentrated Core (Large Cap Growth)
MANAGED ACCOUNTS DIVISION
SECOND QUARTER 2017
Representative Equity Buys and Sells
BUYS (Ticker; Sector)
Zoetis Inc. (ZTS; Healthcare)
Founded in 1952, Zoetis is a global leader in sales of medicines and vaccines for animal health.
The company discovers, develops and manufactures a variety of products for the livestock and
companion animal industries in the U.S. and internationally. Zoetis has a sales presence in over 100
countries and manufacturing capabilities in a dozen countries. We are attracted to the company’s
competitive position in an industry that possesses more appealing dynamics than human health
(lower product development costs, predominantly self-pay vs. insurance, less generic risk) and we
do not believe the current stock price reflects the company’s scale, breadth of products and secular
tailwind in a large and growing end market.
Waste Connections, Inc. (WCN; Industrials)
Waste Connections, the third largest solid waste services company, provides waste collection,
transfer, disposal, and recycling services in the United States and Canada. We believe the company
is well positioned to capitalize on a consolidating industry, and its differentiated strategy of focusing
on secondary and exclusive markets drives better pricing, volume growth, margins, free cash flow
and conversion relative to the two leading industry peers. We are attracted to the resiliency of the
business in a weak economy, while also being levered to an improving economy given its exploration
and production, construction, recycling and third party transfer businesses. With a unique culture
and decentralized management approach that has led to tangible advantages over competitors, we
believe the current stock price does not adequately reflect the company’s long-term growth prospects.
Portfolio Profile
AS OF JUNE 30, 2017
Russell 1000®
Equities
TCW
Growth Index
Number of Securities
32
557
Average Price/Earnings:
Next 12 Months
26.96x
20.46x
PEG Ratio - Forward 1 Yr.
1.61x
1.62x
Price to Sales
4.08x
2.97x
Debt-to-Equity
1.06x1.42x
Dividend Yield
0.61%
1.43%
Projected 3-5 yr.
Revenue Growth
14.40%
8.32%
Projected 3-5 yr.
EPS Growth
19.00%
13.70%
Market Capitalization (Billions)
Average ($ Wtd.)
$148.67
$190.51
Average (Eq. Wtd.)
$96.44
$30.30
Median
$56.84
$10.16
Sector Analysis
AS OF JUNE 30, 2017
TransUnion (TRU; Industrials)
TransUnion provides risk and information solutions to businesses and consumers worldwide. We
believe the company exhibits superior growth among the three credit bureaus due to product
innovation, international expansion and adjacent market expansion. We believe the current
valuation does not reflect the strength of TransUnion’s business model that includes highly
recurring and diversified revenue streams, low capital requirements and strong cash flows.
Consumer Discretionary
Financials
Mobileye N.V. (MBLY; Information Technology)
Mobileye designs and develops microprocessors, software and related technologies for ADAS
(Advanced Driver Assistance Systems) in the global automotive industry. The company offers
proprietary software algorithms and EyeQ chips that perform detailed interpretations of the visual
field to anticipate possible collisions with other vehicles, pedestrians, cyclists, as well as identify
roadway markings, lanes and traffic signs and road boundaries. We initiated our MBLY position in
January 2015 given our view that the current share price did not adequately reflect the company’s
technological lead versus its competitors, asset light and highly scalable business model, and
disruptive cost proposition in a rapidly growing addressable market that we believed was (and is)
still in its infancy. We elected to sell our position after Intel announced its intention to acquire MBLY
for $63.54 per share in an all cash transaction for total enterprise value consideration of $14.7B.
15%
14%
12%
19%
9%
Healthcare
Real Estate
SELLS (Ticker; Sector)
37%
36%
Information Technology
Consumer Staples
Industrials
Materials
Energy
Telecommunication Services
Utilities
Cash
3%
8%
3%
7%
8%
4%
12%
2%
4%
1%
1%
0%
1%
0%
0%
5%
0%
TCW Concentrated Core
Russell 1000® Growth Index
Source: TCW
Based on a managed account model portfolio. Portfolio characteristics and holdings are subject to change at any time. The investment strategy does not target any specific numbers or ranges for
these characteristics. Accordingly, these characteristics can vary greatly. The estimates are forward-looking statements based on assumptions. This would include forward earnings estimates and
growth rates, among other things, and all associated calculations, including projected price/earnings ratios. Actual results may vary materially from the estimates due to the numerous economic,
financial and market conditions. There is no assurance that forecast estimates will be realized. The index is not available for direct investment; therefore its performance does not reflect a reduction
for fees or expenses incurred in managing a portfolio. The securities in the index may be substantially different from those in the strategy.
Reflects up to the three largest buys (new buys) and up to the three largest sells (complete sells) for the quarter. There is no assurance that any securities discussed herein will remain in an account;
be purchased in the portfolio at the time this report is received or that securities sold have not been repurchased. It should not be assumed that any of the securities transactions or holdings
discussed were, or will prove to be, profitable or that the investment recommendations or decisions we make in the future will be profitable or will equal the investment performance of the securities
discussed herein.
Russell 1000® Growth: The Russell 1000® Growth Index measures the performance of the large-cap growth segment of the U.S. equity universe. It includes those Russell 1000® Index companies
with higher price-to-book ratios and higher forecasted growth values.
Russell Investment Group is the source and owner of the trademarks, service marks and copyrights related to the Russell Indexes. Russell® is a trademark of Russell Investment Group.
865 South Figueroa Street | Los Angeles, California 90017 | 877 829 4768 | www.TCW.com | @TCWGroup
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7/26/17