PRICE POINT - IN BRIEF

T. Rowe Price's Global Focused Growth Equity Strategy

David J. Eiswert , Portfolio Manager

Executive Summary

  • Portfolio Manager David Eiswert celebrated his fifth anniversary at the helm of T. Rowe Price’s Global Focused Growth Equity Strategy (GFGES) on 30 Sept 2017. Under his direction, the strategy has posted strong absolute and relative returns, net of fees.

  • Mr. Eiswert employs a disciplined investment process to build a focused portfolio of 60 to 80 of his highest-conviction investment ideas. He seeks out quality companies where our research has discovered insights about improving economic returns in the future, often derived from technological innovation, changing consumer preferences, or other disruptions that lead to major shifts in industry structure.

  • The GFGES may source opportunities from anywhere in the world, including both the developed and emerging markets. Mid- and large-cap stocks make up the bulk of the portfolio, but Mr. Eiswert also may invest selectively in attractive small-cap opportunities. A bottom-up approach emphasizes stock selection as the primary source of alpha.

  • In his first five years as GFGES manager, Mr. Eiswert outperformed both the MSCI All Country World Index (ACWI) and the MSCI World Index on a relative, risk-adjusted basis.

Since taking command of the Global Focused Growth Equity Strategy five years ago, Portfolio Manager David Eiswert has successfully employed a bottom-up approach to identify companies with improving business fundamentals that he believes have the potential to generate rapid growth in future economic returns to shareholders. In an era of technological innovation and the rapid evolution of new business models, this primarily means understanding the forces enhancing or erasing durable competitive advantage and correctly identifying the companies that stand to benefit and those that could be at risk in this process before the broader market does.
 

The objective of the GFGES is to outperform over the full market cycle while managing downside volatility. During Mr. Eiswert’s first five years as portfolio manager, the GFGES achieved 552 basis points (bps) of annualized excess return, gross of fees, over the MSCI ACWI, and 483 bps net of fees (Figure 1). Over that same period, the GFGES ranked in the 9th total return percentile of the eVestment all-cap global growth universe.1
 

Since taking command of the Global Focused Growth Equity Strategy five years ago, Portfolio Manager David Eiswert has successfully employed a bottom-up approach to identify companies with improving business fundamentals that he believes have the potential to generate rapid growth in future economic returns to shareholders.
 

Mr. Eiswert’s investment process is designed to take full advantage of T. Rowe Price’s research platform, which features deep coverage across both major axes of a global equity portfolio—geography and sector—from a team of 162 equity research professionals in local markets worldwide.2 Associate Portfolio Manager Josh Nelson and two dedicated analysts (one based in Baltimore and one in Hong Kong) round out the strategy team and allow for broader and deeper interaction with the firm’s global research platform.

Figure 1: Positive Absolute and Relative Performance

Returns for the Global Focused Growth Equity Composite and Benchmarks, in U.S. Dollars, as 30 Sept 2017.
 

 

Past performance cannot guarantee future results.

Supplemental information.

* Effective 1 Oct 2012, David Eiswert assumed portfolio management responsibility for the strategy.

† Net-of-fees performance reflects the deduction of the highest applicable management fee (Model Net Fee) that would be charged based on the fee schedule appropriate to you for this mandate, without the benefit of breakpoints. Please be advised that the composite may include other investment products that are subject to management fees that are inapplicable to you but are in excess of the Model Net Fee. Therefore, the actual performance of all the portfolios in the composite on a net-fee basis will be different and may be lower than the Model Net Fee performance. However, such Model Net Fee performance is intended to provide the most appropriate example of the impact management fees would have by applying management fees relevant to you to the gross performance of the composite. Supplemental information. Please see the GIPS® Disclosure page for additional information on the composite. Monthly composite performance is available upon request.

‡Returns shown with gross dividends reinvested.

** The Composite Value Added is shown as the Global Focused Growth Equity Composite (Gross of Fees) minus the MSCI All Country World Index.

†† The Composite Value Added is shown as the Global Focused Growth Equity Composite (Gross of Fees) minus the MSCI World Index.

Source: T. Rowe Price.

Source for MSCI data: MSCI. MSCI makes no express or implied warranties or representations and shall have no liability whatsoever with respect to any MSCI data contained herein. The MSCI data may not be further redistributed or used as a basis for other indices or any securities or financial products. This report is not approved, reviewed, or produced by MSCI.

A FOCUSED APPROACH TO GROWTH

The GFGES applies a broad definition to growth investing. The strategy seeks to invest in quality companies where Mr. Eiswert and his team have discovered a specific insight about how the company’s business fundamentals will evolve in the future, leading to improving economic returns to shareholders—typically quantified as their expected future ability to generate earnings and free cash flow.

This approach to growth investing can only be accomplished with deep, rigorous fundamental research, which is used to identify favourable company characteristics such as an attractive industry structure, sustainable competitive advantages, the potential for market share gains, a shareholder-focused management team, and positive change dynamics.

Mr. Eiswert’s stock selection criteria are biased toward quality companies, as defined by the durability of the business and his level of confidence in the management team. Valuations are assessed using a variety of metrics, including sales, cash flow, and earnings ratios; replacement cost; and acquisition value, but these indicators are interpreted relative to the company’s future competitive position and expected growth.
 

At the core of the GFGES approach is Mr. Eiswert’s belief that the global competitive landscape is being disrupted across multiple dimensions, including technological innovation, consumer preferences, and the political and regulatory climate. The key challenge for growth investors in this environment is to position themselves on the right side of change. Because competitive disruption is creating sustainable quasi-monopoly positions across a host of industries for a relatively small group of companies, investors unwilling to take significant positions in their best ideas risk missing out on the extreme performance outcomes that can result.

Figure 2: Global Focused Growth Equity Composite Performance Statistics

Manager Inception* Through 30 Sept 2017.

 

 

Past performance cannot guarantee future results.

* Effective 1 Oct 2012, David Eiswert assumed portfolio management responsibility for the strategy.
This information demonstrates, in part, the firm’s risk/return analysis. This material is provided for informational purposes only and is not intended to be investment advice or a recommendation to take any particular investment action. Statistics based on monthly net returns.

Source: T. Rowe Price.

In Mr. Eiswert’s view, the broader equity market typically underestimates both the potential gains for advantaged companies and the potential losses to disadvantaged companies from disruptive change. In addition, the growth of passive investment strategies often means that both groups of companies within a particular sector or industry basket are traded as a block, without regard to company fundamentals. Mr. Eiswert believes this trend is creating additional opportunities for active investors to buy attractive companies at relatively low valuations in situations where the market is behaving inefficiently.
 

GFGES INVESTMENT PROCESS

The GFGES opportunity set is defined as the full range of global large-cap, mid-cap, and small-cap (at least U.S. $1billion) stocks. Although the global developed markets represented in the MSCI World Index account for the bulk of the portfolio, emerging markets equities can have a meaningful weight in the portfolio as well. As of 30 Sept 2017, the strategy had a 14% exposure to emerging markets.
 

To take full advantage of the potential for alpha from stock selection, portfolio positions typically are limited to 60 to 80 companies—those in which Mr. Eiswert has the highest level of conviction regarding expected future growth. As of 30 Sept 2017, the portfolio contained 72 stocks.
 

Mr. Eiswert is highly conscious of the potential for volatility in a focused portfolio, and close attention is paid to risk factors both at the security and the overall portfolio level. The benefits of this active but risk-aware approach can be seen in the strategy’s relatively high active share, information ratio, and Sharpe ratio relative to the MSCI ACWI over the first five years of Mr. Eiswert’s tenure (Figure 2). During that same period, the GFGES captured 125% of market upside moves but only 98% of downside moves.
 

Key parameters of the GFGES process also include:
 

  • Individual positions typically ranging from 0.50% (the minimum position size) to 5% of the portfolio.

  • Country exposures typically within +/-10 percentage points of the MSCI ACWI. Economic sector weights typically range within +/-15 percentage points of the MSCI ACWI.

  • A U.S. dollar-based portfolio, unhedged. Currency views are incorporated into stock selection.

  • A tracking error target of 400 to 800 basis points relative to the MSCI ACWI.3
     

PORTFOLIO POSITIONING

Reflecting Mr. Eiswert’s intensive focus on company fundamentals, stock selection has been the strategy’s primary source of excess return during his tenure (Figure 3). The investment time horizon is typically 12 to 24 months, or when Mr. Eiswert believes his fundamental thesis and return expectations are fully reflected in the stock price. Sell discipline is primarily based on three situations:
 

  • Successful completion of an investment thesis,

  • Recognition that a thesis is broken, or

  • Displacement of a position due to a more attractive opportunity.

Although stock selection has been Mr. Eiswert’s primary source of value added, his emphasis on disruptive change has resulted in the GFGES owning more positions in sectors that are experiencing disruption through innovation and rapid shifts in relative competitiveness. These currently include the technology, consumer discretionary, and health care sectors (Figure 4). However, the strategy’s broad approach to identifying companies with improving future returns has resulted in some of its best-performing stocks coming from less obvious areas for traditional growth investors, such as financials and industrials.

Figure 3: Global Focused Growth Equity Representative Portfolio Excess Return Attribution

Versus the MSCI All Country World Index, in U.S. Dollars.*
Manager Inception† through 30 Sept 2017 (Annualized)

 

Past performance cannot guarantee future results.


*Returns shown with gross dividends reinvested.

†Effective 1 Oct 2012, David Eiswert assumed portfolio management responsibility for the strategy. The representative portfolio is an account in the composite we believe most closely reflects current portfolio management style for the strategy. Performance is not a consideration in the selection of the representative portfolio. Information regarding the representative portfolio and, where applicable, the other accounts in the composite is available upon request. Please see the GIPS® Disclosure page for additional information on the composite.
 

Supplemental information
Sector attributions may not add to totals due to rounding; all numbers are percentages, Note: Analysis represents the equity-only performance of the portfolio as calculated by the Wilshire Atlas attribution model and is exclusive of cash, trusts, mutual funds, delisted securities, and other non-equity holdings. Returns will not match official T. Rowe Price performance because Wilshire uses different pricing and exchange rate sources and does not capture intraday trading or fair-value pricing. Performance for each security is obtained in the local currency and, if necessary, is converted using an exchange rate determined by an independent third party. Sources: Wilshire Atlas, MSCI/S&P GICS Sectors; analysis by T. Rowe Price Associates, Inc. T. Rowe Price uses the MSCI/S&P Global Industry Classification Standard (GICS) for sector and industry reporting. Periodically, MSCI and S&P make changes to the GICS structure. The last change occurred on 31 Aug 2016. T. Rowe Price will adhere to all future updates to GICS for prospective reporting. Figures are shown gross of fees.

MARKET OUTLOOK

Through the first nine months of 2017, global equity performance was driven largely by growth companies, especially those leveraged to China or other emerging markets. However, because the growth factor has worked so well, markets have become more difficult to navigate, leading Mr. Eiswert to grow a bit more cautious about the equity outlook.
 

Many of the secular growth companies that Mr. Eiswert has successfully identified in recent years as being on the right side of change have performed well, but now have become increasingly crowded trades. While the strategy continues to own some of these companies, Mr. Eiswert is always looking to find new opportunities. Currently, he remains wary of names that are potentially subject to structural challenges but thinks it may be worthwhile to be carefully contrarian in select industries. Traditional U.S. consumer companies, especially those that have brand relationships with their customers that can drive traffic to their stores over time, potentially offer one of the more intriguing potential opportunities, in his view.

T. Rowe Price’s extensive global research platform, coupled with an investment process that is focused on gleaning bottom-up insights into improving returns, provides Mr. Eiswert with the tools to seek out companies that he believes are more likely to be industry survivors over time, giving him the confidence to invest in areas currently out of favor before their potential becomes obvious to other investors.

Figure 4: Relative Sector Weights for the Global Focused Growth Equity Representative Portfolio

As of 30 Sept 2017.

 

 

Past performance cannot guarantee future results.

Supplemental information.

The representative portfolio is an account in the composite we believe most closely reflects the current portfolio management style for the strategy. Performance is not a consideration in the selection of the representative portfolio. Information regarding the representative portfolio and, where applicable, the other accounts in the composite is available upon request. Please see the GIPS® Disclosure page for additional information on the composite.

Sources: MSCI and T. Rowe Price.

ABOUT MR. EISWERT

David Eiswert has been the portfolio manager for the Global Focused Growth Equity Strategy since 1 Oct 2012. Prior to his current role, Mr. Eiswert was the portfolio manager for the Global Technology Strategy from October 2008 until May 2012. He was a technology analyst from 2003 until 2012. Mr. Eiswert has 17 years of investment experience, 14 of which have been with T. Rowe Price. Prior to joining the firm in 2003, he was an analyst at Mellon Growth Advisors and Fidelity Management and Research. He also worked as a consultant in the communications industry. Mr. Eiswert earned a B.A., summa cum laude, in economics and political science from St. Mary’s College of Maryland and an M.A. in economics from the University of Maryland, College Park. He also has earned the Chartered Financial Analyst (CFA) designation.  

The GFGES ranked 6 out of 64 strategies in the eVestment database with performance records extending from the manager inception date through 30 Sept 2017. eVestment collects information directly from investment management firms and other sources believed to be reliable. eVestment does not guarantee or warrant the accuracy, timeliness, or completeness of the information provided and is not responsible for any errors or omissions. Performance results may include additional disclosures available on eVestment systems and other important considerations, such as fees, may be applicable.
 

2 13 sector portfolio managers, 95 research analysts, 45 associate research analysts, 6 quantitative analysts, and 3 specialty analysts as of 30 Sept 2017.
3 The tracking error target is not a formal objective and it can be changed without prior notice at any time. There is no assurance that the target will be met.
 

GIPS Disclosure:

1 Reflects deduction of highest applicable fee schedule without benefit of breakpoints. Investment return and principal value will vary. Past performance cannot guarantee future results. Monthly composite performance is available upon request. See below for further information related to net-of-fee calculations.
 

2 Primary benchmark is MSCI All Country World Index and secondary benchmark is MSCI World Index.
 

T. Rowe Price (TRP) has prepared and presented this report in compliance with the Global Investment Performance Standards (GIPS®). TRP has been independently verified for the 21-year period ended June 30, 2017, by KPMG LLP. The verification report is available upon request. Verification assesses whether (1) the firm has complied with all the composite construction requirements of the GIPS standards on a firmwide basis and (2) the firm’s policies and procedures are designed to calculate and present performance in compliance with the GIPS standards. Verification does not ensure the accuracy of any specific composite presentation. TRP is a U.S. investment management firm with various investment advisers registered with the U.S. Securities and Exchange Commission, the UK Financial Conduct Authority, and other regulatory bodies in various countries and holds itself out as such to potential clients for GIPS purposes. TRP further defines itself under GIPS as a discretionary investment manager providing services primarily to institutional clients with regard to various mandates, which include U.S., international, and global strategies but excluding the services of the Private Asset Management group. The minimum asset level for equity portfolios to be included in composites is $5 million, and prior to January 2002 the minimum was $1 million. The minimum asset level for fixed income and asset allocation portfolios to be included in composites is $10 million; prior to October 2004 the minimum was $5 million; and prior to January 2002 the minimum was $1 million. Valuations are computed and performance reported in U.S. dollars.
 

Gross performance returns are presented before management and all other fees, where applicable, but after trading expenses. Net-of-fees performance reflects the deduction of the highest applicable management fee that would be charged based on the fee schedule appropriate to you for this mandate, without the benefit of breakpoints. Gross and net performance returns are net of non-reclaimable withholding taxes on dividends, interest income, and capital gains. Effective June 30, 2013, portfolio valuation and assets under management are calculated based on the closing price of the security in its respective market. Previously portfolios holding international securities may have been adjusted for after-market events. Policies for valuing portfolios, calculating performance, and preparing compliant presentations are available upon request. Dispersion is measured by the standard deviation across asset-weighted portfolio returns represented within a composite for the full year. Dispersion is not calculated for the composites in which there are 5 or fewer portfolios. Some portfolios may trade futures, options, and other potentially high-risk derivatives, which generally represent less than 10% of a portfolio. Benchmarks are taken from published sources and may have different calculation methodologies, pricing times, and foreign exchange sources from the composite. Composite policy requires the temporary removal of any portfolio incurring a client-initiated significant cash inflow or outflow greater than or equal to 15% of portfolio assets. The temporary removal of such an account occurs at the beginning of the measurement period in which the significant cash flow occurs, and the account re-enters the composite on the last day of the current month after the cash flow. Additional information regarding the treatment of significant cash flows is available upon request.
 

The firm’s list of composite descriptions and/or a presentation that adheres to the GIPS® standards are available upon request.

A portfolio management change occurred effective October 1, 2012. There were no changes to the investment program or strategy related to this composite.

 

201711-293101

Global Equities
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