When Winslow Capital outgrew its offices in the IDS Center in downtown Minneapolis, it said goodbye to the dark wood and closed layout of its old digs. Though just a few floors away, the new offices are all about modern design, natural light, and collaborative spaces. One thing that didn’t get lost in the makeover is the firm’s culture, which centers on what Justin Kelly, the firm’s CEO and chief investment officer, describes as “being a Winslow.”
What does that mean? For one thing, most employees join the firm with the intention of staying indefinitely. “A lot of people in this business are taught to think of themselves as hired guns,” says Kelly, who worked as an investment banker at what was then Solomon Brothers in New York until he moved home to Minnesota and over to asset management in the late 1990s; only two people have left the investment team during his tenure. “We wouldn’t hire anybody if there wasn’t an implied agreement that they were going to spend the rest of their career at Winslow, because turnover can take away from the portfolio.”
Winslow actually has three portfolios—including one focused on international stocks and one on private companies—but most of its $22 billion in assets under management are in its flagship U.S. growth strategy. It’s the basis of the $12 billion MainStay Large Cap Growth fund (MLAAX), which Winslow has subadvised since its 2005 inception. The fund is up an average of 10.4% a year over the past 15 years, well ahead of its peers and its benchmark.
Growth has been the firm’s forte since Clark Winslow founded it in 1992, but Kelly and the six sector analysts who run this fund look for many shades of growth. “We’ve tagged and labeled every stock with $4 billion or more in market cap in one of three buckets—dynamic, consistent, or cyclical,” says Kelly, who is 48. While Kelly sometimes tilts the balance to reflect what’s happening in the economy, all types of growth are represented in the portfolio.
Roughly a third of the fund is dedicated to dynamic growth—companies growing revenue at least 10% a year. Salesforce.com (CRM) is a textbook example. “Salesforce has been able to gain material market share because they were really the first in the customer relationship-management area to offer real-time upgrades with software-as-a-service,” says Kelly, who first bought the stock in 2006 when it was trading for less than $9 a share. The company isn’t exactly undiscovered, but Kelly and his team think the market is underestimating its future growth. “You could see free cash flow growing 25% or so the next three years as they expand into new markets and retain their existing stronghold in CRM,” he says.
Another third of the portfolio falls into the category of consistent growth—companies that can improve their revenue 5% to 7% a year in virtually any macroeconomic environment. The fund’s largest holding, Microsoft (MSFT), falls squarely into this group. “Here’s a company that was thought to be a share loser because of cloud computing,” says Kelly, who bought the stock in October 2015 at $53 a share and has added to the position on market dips. Meanwhile, Microsoft has managed to make the transition to the cloud—and Kelly sees plenty room for steady growth ahead as more businesses move from on-premise computing to the cloud. “Only about 20% of IT workloads are in public cloud-computing environments today, and we believe that’s going to 60% or higher,” he adds.
Rounding out the mix are cyclical growers. These companies tend to be economically sensitive—but still offer upside. In the case of Honeywell (HON)—a conglomerate whose products range from aerospace and footwear to manufacturing and health care—Kelly and his team saw potential for the management team to do “self-help,” by cutting costs and optimizing its portfolio of businesses. The fund bought the stock in early 2016 at $98 a share; it recently traded near $170.
The team is always on the lookout for disconnects between the market’s outlook for a company and the reality. There are typically two entry points. The first is when the market underprices the duration of the growth, as Kelly thinks to be the case with Visa (V) and Mastercard (MA). “The companies today are still growing at pretty much the same rates they grew at 10 years ago,” says Kelly. He says the payment giants could keep lifting revenue about 10% a year as more global payments go from cash to cards.
The second is when the market underprices the magnitude of growth. “A good example is Xilinx (XLNX), which is a stock we bought last year,” he says. The company specializes in programmable silicon used in everything from cars to consumer products, he says, and could get a boost from 5G wireless. “Our earnings and free-cash-flow estimates were substantially ahead of the Wall Street forecast,” he says. The stock has nearly doubled in value over the past year.
Just as important as seeing hidden potential is spotting unforeseen problems. In 2017, Winslow’s technology analyst and Kelly surmised that Apple (AAPL) was losing its pricing power. “They weren’t innovating at the same rate they had historically, and competitors were coming out with products that were almost as good and half the price,” he says of the decision to start exiting the position.
It was a contrarian view at the time—Apple’s market value hit $1 trillion last August 2018—but it proved to be right. In January it cut guidance, triggering the stock’s biggest loss in six years.
Kelly credits another Winslow-ism with the firm’s bold decision. “We don’t talk about a stock as being Steve’s stock or Kelly’s stock,” he says. “It’s always the client’s stock.”
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