T. Rowe Price: US Large Cap Growth Equity Strategy

Taymour Tamaddon, CFA, Portfolio Manager
The US has been the outstanding performer in 2018 among major markets. How do you see the rest of the year playing out?

The US has had a really strong start to the year in 2018 and I think there are probably two fundamental catalysts that will impact the remainder of the year. The first is the midterm elections in the US and I think the key question there is do the Republicans hold the Senate. I think most of the market is expecting the Republicans to lose control of the House, but whether they keep control of the Senate will really be the key determining factor. And then the other key catalyst that I think will determine how the markets end the year will be what happens with the tariff situation in China. Does it continue to expand, do we expand and get the tariffs to go from 10% to 25%, and do we expand from the US$200bn to the additional US$267bn that Trump has spoken about? I think if that were to happen, the expansion of the tariff policy, that would probably lead the markets downward, and if we see any sort of settlement I think it would be a very meaningful positive to the markets.  

Growth has continued its strong outperformance of Value. Are you concerned we’re reaching the turning point, and how are you positioned in this environment?

Really the last decade growth has outperformed value and it’s been specifically strong over the last few years. I think one of the things I’m on the watch for is whether there’s any signs that we’d be seeing a turn or an inflection in terms of Value starting to outperform Growth. When I think of the things that are knowable that would be suggestive of a turn I think of two main things. One would be is there an increased inflation risk and the second is whether we could see any sort of a recession. In terms of inflation risk, the market’s actually expecting a relatively stable and low interest rate environment. As long as that continues I think that’s very positive for Growth to continue to outperform Value. The second factor in terms of recession risk, obviously it’s very difficult to predict a recession and it’s not something that I’ve been able to demonstrate the ability to do continuously. We spend a lot of our time on stock specific insights. But in terms of a recession risk, one of the biggest things I look for would be a misallocation of risk or capital on the market. Similar to 2007/2008 when we saw the housing bubble, there was a lot of misallocated capital into that market. I’m not seeing any signs of a significant misallocation of capital and so I’m relatively positive on the market and am positioned as such.

Hasn’t the growth rally largely been a FAANG story?

One of the misconceptions in my mind is that all of the outperformance in Growth investing has been driven by the “FAANG” stocks. If you look even at just the Russell 1000 Growth benchmark, which is the Growth benchmark that we use for the strategy, 24-25% of the performance has been driven by ‘FAANG’ stocks and one of the things I’m really proud of is that for this particular strategy, if you look at our excess performance, roughly 78% of it has been driven outside of our ownership of these so-called ‘FAANG’ stocks. I think that really speaks to the platform, the analyst expertise, the industry expertise that we have with 165 analysts across the globe at T. Rowe Price, and that resource set is what enables us to make clients’ money outside of these, you know, “FAANG stocks”.

Where are you seeing opportunities currently?

One is trying to find companies that we think can dramatically exceed expectations in terms of growth, and to give you a recent example, Tesla, which is the electric vehicle company. I think the primary thesis there is that our expectations are that the Model 3 ramp is really starting to hit its stride in terms of the production. But most importantly, our expectations for the profitability of the Model 3 are above what the market is anticipating. So that’s on the high end of the growth spectrum.  

Can you highlight a position that really typifies your investment approach?

There is no one typical investment approach. We kind of really rely on the 165 analysts across the platform to find insights into companies. One of the best examples of finding those insights is a company called Intuit. Intuit has two main businesses. One is on the tax side, so they provide tax software that’s used by roughly 70% of the US residents who do taxes themselves; the other side of their business is an accounting software called QuickBooks. And the reason that I think Intuit is such a good example is because it really provides a view into the collaboration that happens at our firm. So understanding what’s happening in the small and mid-size businesses, understanding what’s happening on the software side, understanding what’s happening in tax and tax reform and what that all means, our software analysts pulls all of that together to develop an informed insight into which it should be able to perform extremely well on both sides of those. And just to really try to highlight our differentiation, there’s a material innovation coming out of Intuit on the tax side for do-it-yourself. It’s something called Tax Live. Historically, Intuit has been able to grow close to double digit on their tax business. But they’re about to introduce a new technology that actually allies a professional tax accountant to work alongside you at home while you’re filling out your taxes, and they’re going to be providing that service at about a 65% discount to what that service normally costs consumers. And that is a major TAM (Total Available Market) expander for the company and is probably one of the biggest insights we have.

The specific securities identified and described in this report do not represent all securities purchased or sold for this Strategy. This information is not intended to be a recommendation to take any particular investment action and is subject to change. No assumptions should be made that the securities identified and discussed were or will be profitable.


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