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8 | INVESTMENT EXECUTIVE NEWS
NEWSMAKER
Methodology
Investment Executive (IE) uses a points-based scoring system to rate Canadian mutual funds that have a minimum record of 10 years. Points are awarded for each year of positive annual returns as well as for relative outperformance and quartile rankings. IE also assesses cumulative 10- year returns, management expense ratios and vola- tility. Data are courtesy of Morningstar Direct.
December 2020
Jim Stillwagon, vice-president with T. Rowe Price Group Inc., is Investment Executive’s Mutual Fund Manager of the Year.
Finding enduring patterns
and to Netflix’s expansion of its production capacity as positive signs for continued growth.
Stillwagon also looks for signs of permanent changes in con- sumer behaviour that are emer- ging as a result of the pandemic. Food and grocery delivery servi- ces such as DoorDash, Instacart and Amazon Fresh were given an unprecedented trial per- iod for their operations during Covid lockdowns, he says, and demand has held up as initial virus restrictions receded.
Stillwagon attributes the TD fund’s steady long-term per- formance in part to its 70/30 split between growth stocks focused on digital disruption and com- munications infrastructure com- panies that enable the disruption. “That balance has served us well over the years — and particularly in 2020,” he says.
While the 70/30 split is a main- stay, the makeup of those baskets evolved as the growth portion shifted to e-commerce. During the equities sell-off in March, though, the 30% portion of the portfolio shone. The tower com- panies and cable providers — “the steady, subscription-based com- pounders” that make up the 30% basket — provided high-quality ballast, Stillwagon says. As spring lockdowns forced huge numbers of people to work, study and entertain themselves at home, internet providers were busy. “All of those dynamics amount to a free, daily, nationwide adver- tisement for broadband speed-up rates,” he says.
Shifts in consumer behav- iour also may benefit the port- folio’s less disruptive portion. Prior to the pandemic, about half of Connecticut-based cable com- pany Charter Communications Inc.’s customers used self- installation kits for their service, Stillwagon says. At the peak of the pandemic this spring, customers didn’t want technicians in their homes, so that proportion jumped to almost 90%, which allowed Charter to spend less on vehicles and technicians. “[That propor- tion] is not going back to 50/50,” he adds, “and that has potentially significant consequences for the long-term margins.”
Since the U.S. election and the string of positive news on Covid- 19 vaccines that followed, many investors have been expecting a
rotation out of growth stocks in favour of value after a prolonged period of outperformance for the former. Regulation also poses a potential headwind for some mega-cap tech stocks: the U.S. Dept. of Justice launched an antitrust lawsuit against Google in October, and some observers expect harsher treatment for big tech on Capitol Hill.
Stillwagon says he’s not worried about valuations for the TD port- folio’s holdings being too rich.
“We’re not seeing the really aggressive multiple inflation with the mega-cap internet plat- forms that can get pulled — in our view, unfairly — into the valua- tion bubble debate and into the rotation debate,” he says. “We’re choosing every day to hold a pos- ition in the same way we would choose to initiate a position.”
On the regulatory side, Stillwagon says, he anticipates the U.S. Federal Trade Commission will follow the Dept. of Justice and file an antitrust suit against Facebook. However, he points to U.S. antitrust precedent prioritiz- ing the consumer over competi- tion, adding that mega-cap tech platforms have the advantage of offering consumer-friendly, mostly free services.
The visits Stillwagon would normally undertake to discuss these and other matters with companies’ management teams have been reduced to Zoom calls, which offer one advantage: the CEOs are easier to reach at home.
Still, those calls don’t offer the same experience as spending days on a studio lot with Netflix’s content team, for example, trying to understand why the company is building studio capacity to rival what major production compan- ies built over a century. Site vis- its help Stillwagon understand a company’s capital allocation and long-term strategy, he says.
“We’re not a ‘secret sauce’ type of investor. [Our strategy] is fundamental, bottom-up research and spending a signifi- cant amount of time with the management teams,” Stillwagon says. “That is a different skill set than trying to gauge whether a 200-million paid subscriber base will beat or miss by a couple hun- dred thousand in a given quarter. Both can be legitimate invest- ment strategies — but you have to play to your strengths.” IE
Jim Stillwagon’s first year as a portfolio manager was a memorable one
BY MARK BURGESS
reflects the pattern recogni- tion that comes from analyzing companies across the extremes of [tech, media and telecom], from the structurally impaired model of analogue media to the growth stories of mega-cap tech,” Stillwagon says.
Part of that process is learn- ing to recognize patterns that won’t change — a skill that may be especially important in a year of tremendous disruption. The pandemic has accelerated trends in online consumption, such as grocery delivery, that otherwise may have taken years.
The TD fund is built on high-conviction investments that often are held for more than a dec- ade — the fund’s turnover is below 20% per year, Stillwagon says — and the top 10 positions comprise more than 50% of the fund.
“We’re always trying to strike the right balance between high conviction and responsible con- centration,” Stillwagon says. In a volatile year like the current one, owning high-conviction names that have been portfolio main- stays, such as Amazon, can be reassuring. “In that sense, we’re that much more excited about Amazon’s pursuit of expedited free delivery because it’s all about what’s not changing,” he says.
While Amazon, Netflix and others clearly have benefited from pandemic lockdowns, Stillwagon is assessing the durability of the Covid-19 bumps: “Who is respond- ing with commensurate invest- ment to match the ‘new normal’ of e-commerce demand?”
Stillwagon points to Amazon’s massive investments in its ware- house space and delivery fleet
in a normal year, jim
Stillwagon would be flying around the U.S., hanging out on Netflix Inc.’s studio lots and asking hard questions of Silicon Valley management teams. He would be driving up and down Interstate 95 between his home in Bethesda, Md., and his Baltimore office rather than sharing his workspace with his three-and- a-half-year-old daughter.
In a normal year, the mutual fund Stillwagon manages — the TD Global Entertainment & Communications Fund — might not be up by 45%. But 2020 has been far from normal, and Stillwagon is Investment Executive’s Mutual Fund Manager of the Year.
Stillwagon joined the TD fund’s subadvisor, Baltimore- based T. Rowe Price Group Inc., as vice-president in 2017, and took over as the fund’s portfolio manager (PM) in November 2019. “They don’t always recommend starting your PM career in the middle of a global pandemic,” he says. However, there’s plenty to recommend the $1.6-billion TD fund’s performance.
A number of investment prod- ucts have experienced a meteoric rise since April, when equities markets recovered and busi- nesses catering to online con- sumers and home-based workers saw their profit soar. But 2020 is barely an outlier for the TD fund: this is the third year returns have
topped 30% since 2013, when the fund returned a staggering 46.79%, according to data from Chicago-based Morningstar Inc.
The T. Rowe Price version of the fund, launched in 1997 and offered in the U.S., origin- ally was called the Media & Telecommunications Fund — “a true misnomer” relative to its holdings, Stillwagon says. Even now, there’s a significant tech- nology allocation (48.20%) for a fund that doesn’t include “tech- nology” in its name (although the U.S. name is the T. Rowe Price Communications & Technology Fund). The top five holdings are Amazon.com Inc., Alibaba Group Holding Ltd., Facebook Inc., Alphabet Inc. (a.k.a. Google) and Netflix.
Stillwagon took over portfolio management last year from Paul Greene, the TD fund’s portfolio manager since 2013. The two men became friends while covering the technology, media and tele- communications sector for differ- ent firms for a number of years.
Stillwagon began his career in finance as a consumer retail ana- lyst at Goldman Sachs Group Inc. He then worked for hedge fund Maverick Capital Ltd. in the U.K., shorting European legacy media — on the brink after analogue ad spending collapsed during the global financial crisis in 2009 — before he began to cover the U.S. consumer internet industry.
“My investment process today
“We’re always trying to strike the right balance between high conviction and responsible concentration”
Performance of the TD fund
The TD Global Entertainment & Communications Fund’s 10-year annualized return is 19.69% as of Nov. 30, well above the 7.11% for the benchmark Morningstar global markets GR (CAD) index, according to data from Chicago- based Morningstar Inc. The fund’s annual returns were in the top quartile for eight of the past 10 calendar years and the fund is positioned to remain there in 2020. Last month, the fund won a Refinitiv Lipper Fund Award for 10-year performance.
The TD fund’s shorter-term performance also is impressive. The five-year average annual gain is 19.15% as of Nov. 30, well ahead of the benchmark’s 8.51%; and the three-year annualized return is 22.92%, compared with 13.53% for the index.
The TD fund’s management expense ratio is 2.83%.
ELLIOTT O’DONOVAN