Winslow’s investment process is fundamentally driven, with an underlying valuation discipline. The team takes a “bottom-up” approach, basing decisions primarily on company-specific factors rather than general economic conditions. The investment decision-makers conduct their own analytical research. In doing so, the investment team looks for stocks of high quality growth companies that can generate positive earnings surprises. Stock selection, portfolio construction, and the team’s sell discipline each contribute towards the generation of alpha.
When constructing portfolios, the investment management team looks to diversify holdings across three types of earnings growth, with no “preferred habitat,” to participate in different market cycles:
- Long-term sustainable earnings growth
- Cyclical growth in the “right part” of the cycle
- Newer industries with rapid growth
Portfolio construction also involves diversification across economic sectors (+/- 10% benchmark), Price-to-earnings ratios (10x – 40x), market capitalizations ($4 billion - $500+ billion), and earnings growth rates (12% – 50+% - average typically around 18%). This level of diversification enables the team to manage risk by not having significant overexposure to any one area of the market, while allowing enough flexibility to take active bets versus the benchmark. According to Clark Winslow, Chief Executive Officer, “In order to beat the benchmark, you have to be different from the benchmark.”
Winslow’s sell discipline helps drive investment performance and control portfolio risk. The rules inherent in their sell discipline keep Winslow’s decision-makers objective, which is an important trait linked to achieving investment success. While other managers may hold on to a declining stock, Winslow acts decisively without allowing emotion to cloud their judgment. Similarly, Winslow does not become overly committed to a stock that has performed well. A position is either trimmed or sold based on the following guidelines.
- When fundamental reasons for owning the stock begin to deteriorate, the stock is sold.
- Should valuation of a stock reach a level believed to be full, it is either trimmed or sold.
- Consistent with portfolio optimization, a position is trimmed or sold entirely to invest in a potentially better opportunity.
- Complete review after a 20% decrease from either a stock’s purchase price or its recent high.
- A stock position is reduced when the position size exceeds the greater of 5% of the MainStay Large Cap Growth Fund’s holdings, or the benchmark weight plus 1%.
Winslow believes they can generate consistent excess returns by investing in quality companies with above-average growth. While above-average growth is a necessity, valuation relative to estimated earnings or cash flow growth rates is also important in selecting a stock. Winslow’s goal is to find securities that are likely to beat “street” consensus estimates. In order to find such opportunities, the investment team leverages their research skills.