The following is another excerpt from our recently published Q4 Dynamic Growth Opportunities (DGO) update. For a copy of the full document, please contact us.
Raison D’être: Alpha Delivery
In terms of the 53 positions held in our strategy, only four netted a positive return during the fourth calendar quarter. On a relative basis, 26 fared better than our index, as market volatility proved difficult to circumvent for any long-term focused investor. Below we dive deeper into issuer-specific drivers that aggregated to these portfolio results, looking at the top contributor and detractor to DGO performance during 4Q2018.
Top Portfolio Contributor: CME Group Inc. Class A [CME]: +12.0%
Overall, the financial services sector skews to the smaller exposures for our index, sector-wise, with the Russell 1000 Growth assigning a heavier weighting towards investment services and payment services issuers than traditional banks and insurers. Coming off a muted year of volatility during our strategy’s pre-inception period, CME Group stood out as an attractive opportunity to gain exposure to a diverse derivatives marketplace business. Demand tailwinds include large institutions increasingly looking to manage factor exposures via derivatives, high frequency trading demand, and risk mitigation practices among myriad market participants, all of which position CME better than the constituent list of mutual fund managers, online brokers (outside of Schwab), and more equity-focused marketplaces that comprise our underweights in financial services.
Top Portfolio Detractor: Detractor: NVIDIA Corporation [NVDA]: -52.4%
As the largest semiconductor index constituent heading into 4Q, NVIDIA is a stock to which we pay close attention regardless of our outright ownership status. Not owning it can be just as harmful to alpha generation as owning it. Heading into the quarter, we saw it prudent to err on the slight underweight side given the near-balance of the bull and bear case on the stock in the context of where it was trading. It is hard to find a semiconductor thesis with a more attractive growth runway, both in relative upside percentage and gross dollar opportunity of its addressable markets. The core of this is NVDA’s parallel compute architecture that runs workloads across the largest webscale data centers, autonomous driving applications, and neural networks that are the backbone to artificial intelligence. Many of these opportunities began to be reflected in the stock’s pricing, trading near 37x forward earnings at the start of the 4th quarter. Despite the attractive longer-term prospects that are still intact for NVDA, the stock suffered from the adverse impact of stalled cryptocurrency demand along with channel inventory glut, while its core gaming GPU segment decelerated to +13% YoY after posting +52% in the prior quarter. As often happens in nascent computing markets, the bridge to meaningful revenue opportunity can be a bumpy ride as companies shift resources from legacy (for NVDA: PC-based graphics) towards next-gen opportunities (data center and automotive). We still see NVDA as having a war chest of intellectual property, along with software code advantage with its CUDA-based ecosystem, all of which begs for a better entry point to revisit our slight underweight.
To receive a copy of our entire SWS Growth Equity quarterly update, please contact us.