Jim: We take a similar approach when we look at some of the big trends. We like “picks and shovels” makers rather than trying to pick the winners. So, for example, with EVs, it’s very hard to know which carmakers are going to be the leaders. But companies that provide equipment for vehicles, such as Eaton or Amphenol, will benefit from increased demand for EVs, in our view.
Our Concentrated US Growth portfolio holds about 20 companies, and we look for companies that offer differentiated sources of earnings growth, which can do well in a variety of macroeconomic scenarios. Companies that we hold in the portfolio provide diversified opportunities derived from a range of sources—from Mexican beer sales to cellular towers to the growth of data usage around the world
John: Our philosophy balances profit and reinvestment opportunity, which we can find in different parts of the market. Cybersecurity is an interesting part of the technology industry; we hold CrowdStrike, a profitable and fast-growing cybersecurity leader that we believe will continue to benefit from an ever-expanding attack surface, as well as from advances in AI. CrowdStrike was early in using traditional AI to detect anomalies and is now pressing ahead with generative AI functionality that will further enhance its abilities to catch threats. In healthcare, we see several attractive long-term growth trends that aren’t vulnerable to drug-pricing volatility, including robotic surgery and animal health. Growth can be found in surprising industry segments. Think about auto salvage, which might not sound very exciting. But a company like Copart offers attractive asset growth at surprisingly high double-digit returns on capital, and benefits from a network effect by winning business from major insurers and profitably by shipping banged up cars overseas.
Q: The macroeconomic backdrop to markets looks challenging, as interest rates are expected to be higher for longer, even though inflation has fallen sharply. What does that mean for equity investors?
Ben: Interest rates are a blunt tool, and they tend to work over time. And the Fed has been embarking on a historic rate cycle, raising interest rates at an unprecedented pace. We came into the year believing that there would be an effect on the economy, and we saw some of the effects in the banking system earlier this year. If the economy does slow because the availability of loans becomes tighter or the cost of borrowing has gone up, it will be felt in the corporate sector and earnings as well. The good news for us is that for our portfolio to be successful, we don’t need to get the macro outlook exactly right. We’re invested in secular transformations that are likely to progress and deliver growth even if GDP growth is challenged.
Jim: The US Federal Reserve and central banks around the world have been effective. They’ve brought down real inflation significantly. I think that gives the Fed the flexibility to really slow down the pace of hikes as we go forward. The market is certainly discounting that. So, what does this mean for earnings? If nominal GDP is much lower, overall revenue growth for corporate America will be lower, yet the cost pressures are still there. Taken together, this means there will probably be more earnings pressure as we go forward. This has started to play out in consensus number cuts for the broader market in June compared to the stability from March to May. As earnings estimates tick down again, being selective, and finding reliable sources of long-term secular growth, will be incredibly important for equity investors.