Kenneth Broad loves the details. When he recently had a chance to promote a concert by one of his all-time favorite bands, the B-52s, Broad handpicked the artist to make the poster, personally designed the T-shirt, and rationed the VIP badges himself. Another time, a chance reading of the Magna Carta sent Broad on a deep dive into the workings of property rights. He approaches investing the same way, focusing on just one or two names at a time and immersing himself in the details.
By contrast, Broad’s longtime investing partner, Christopher Bonavico, brings a generalist’s approach to co-managing the $509 million Jackson Square SMID-Cap Growth fund (DCGTX). Just look at Bonavico’s passport—he has traveled to 55 countries and doesn’t have a favorite. As a stockpicker, he often looks into multiple ideas at once. “Charlie Munger once said people calculate too much and think too little,” Bonavico says, invoking Warren Buffett’s co-pilot. “I like to sit back and think—about where the consumer is going in five years, what will still be a competitive advantage, or how technology is going to change the way we live—to form a mosaic.”
Broad and Bonavico are both 52, and both studied economics. While Broad began his finance career as a business valuations analyst for a mergers-and-acquisition group at KPMG Peat Marwick, Bonavico started as a sell-side analyst at Salomon Brothers. Despite coming at stock-picking from different angles, the two have managed money together harmoniously for 17 years, first at Transamerica Investment Management and now, for more than a decade, as co-managers of the Jackson Square SMID-Cap Growth fund (DCGTX).
The concentrated growth fund has consistently beaten peers, averaging an annual return of almost 16% over the past decade, topping Morningstar’s mid-cap growth category. Over the past year, its 28% return has beaten 94% of its peers.
The fund holds just 30 stocks and hangs on to them for a long time, with a third of the portfolio held for more than a decade. The managers look for companies smaller than $7.5 billion in market value, with competitive advantages that are often growing stronger, and will hold the stocks until they approach the higher end of their threshold of about $15 billion.
Instead of using metrics common among growth investors, such as price to earnings growth or enterprise value to sales, the co-managers focus on free cash flow, balance sheets, and returns on investment, and look to buy companies trading below their estimated intrinsic value. That focus has helped the fund hold up better during market downturns, even though it may trail a bit when the market is on a tear.
The co-managers don’t buy the idea that companies have to choose between investing in fast growth or returning money to shareholders. Instead, they seek out those whose business models allow them to do it all, like Dunkin’ Brands Group (DNKN). The company’s franchisee model generates lucrative margins, and the company continues to expand while paying a dividend and buying back stock. The stock is up 25% over the past year, but Bonavico sees further opportunity, especially as the company moves beyond drip coffee to offerings like espresso-based drinks.
The co-managers often look for change in the air before getting into a stock—whether that’s a spinoff, a shift from an asset-intensive model to a franchisee approach, or new management—as was the case when they bought Logitech International (LOGI) four years ago. That was shortly after Bracken Darrell was brought in as chief executive to move the company away from computer keyboards and mice, and toward faster-growing devices like tablets and Bluetooth speakers.
“A sell-side analyst asked if we were Dumpster diving. But like a restaurant with a new chef, new management can create a completely different experience,” says Broad. “And when they are incentivized properly, you can get magical outcomes.”
Management compensation is a pet topic for the co-managers, who seek companies that align management’s interests with investors’. Two holdings that do just that: Logitech and cloud-based communications company j2 Global (JCOM). Both companies gave their then-new CEOs out-of-the-money options, aligning their pay to the long-term performance of the company.
In a world of disruption, Broad and Bonavico look to own the disrupters, which make up about a third of the portfolio. They owned Netflix (NFLX) in 2005 when people were still renting DVDs at Blockbuster and no one was thinking about digital streaming, and Expedia Group (EXPE) after Microsoft (MSFT) spun it off. Neither are in the portfolio at this point, but today the co-managers like real estate brokerage Redfin (RDFN). Bonavico says the company is often mistaken for just a lead-generation site like Zillow, underestimating the power of its technology and its ability to take the hassles and costs out of transactions.
“Residential real estate is one of the largest markets that has yet to be disrupted,” he says. “Traditional residential brokers are sometimes at odds with their clients and not incentivized on the quality of their performance.”
About two-thirds of the portfolio is in more-established companies with proven businesses and wide competitive advantages. The managers put Dunkin’ Brands in that category, and also the New York Times (NYT). That company, they say, is transforming into a leading player in digital media. Digital subscriptions were up more than 40% last year—and that growth isn’t fleeting, as some had assumed, Bonavico says. In fact, the co-managers say, the company eventually could be put into the same category as Spotify Technology (SPOT) and Netflix, and get valued as a digital subscription business.
The New York Times’ balance sheet is also a draw. On the surface, the company has about $750 million in cash, but buried in the footnotes is a provision that would let the company buy back its New York headquarters, which it now leases after a sale, for $250 million—even though the building is now valued at about $1 billion. Added to the company’s strong digital growth prospects, Broad says, that hidden bonus gave them enough comfort to make the stock their top holding, at 5% of assets.
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