Concentrated exposure to high-growth opportunities

TD Global Entertainment & Communications manager looks for disruptive innovators and the infrastructure builders that enable them.

Diana Cawfield 1 November, 2018 | 5:00PM

As a high-conviction manager, Paul Greene focuses on finding the very best companies that can compound over a long period for his TD Global Entertainment & Communications mandate. Greene is a vice-president, analyst and the lead manager of the Morningstar five-star rated fund at T. Rowe Price Associates in Baltimore.

"We are more concentrated in our positions," says Greene. "I like to call them race horses, not because they're the fastest growing companies, but these are not your average horse, they're capable of winning multiple horse races over time." Approximately 60% of the fund's assets are among the top 10 investments.

According to Greene, when you find great companies and have insights, you can build big positions. "We don't have to trade unless there are fundamental changes," says Greene. "As a result, we have portfolio turnover that's 10% or lower."

The bottom-up investment process incorporates two "buckets" of holdings in the predominantly large-cap fund. The first includes a bucket of disruptive, innovative-type companies -- companies that are taking market share or penetrating markets. The businesses sought have some sort of structure edge and tend to grow faster. "These are companies like (U.S.-based)  Alphabet (GOOGL),  Amazon.com (AMZN),  Facebook (FB) and  Netflix (NFLX)," says Greene; all four are included in the top 10 holdings.

The second bucket of investments includes the "enablers" of the companies in the first bucket, businesses that provide infrastructure or capabilities that the first companies need. According to Greene, a good example is the wireless tower companies that allow Alphabet or Amazon to facilitate what they're doing on mobile devices or on Facebook. These companies tend to be more stable, more mature, predictable and a little bit more defensive.

"Hopefully," says Greene, "we're picking the companies within each of those buckets that have some sort of structural advantage. Companies that we think are going to enable them to earn outsize returns over time, companies that are going to be durable, with moats around their businesses."

As a result of the stock-picking strategy, about 77% of the portfolio is in U.S. equities. When it comes to the cable and tower companies, there is a lot more market cap available in these areas in the United States, says Greene. As well, within the internet space, there are a lot more names in the U.S., with China being the exception.

Greene draws on a global research team of over 30 analysts who look for three basic things when trying to identify a race horse. The first is foundational strength, including a good industry structure, a great business model, good management teams and valuations that make sense. The second thing is to have insight relative to the market. "We want to feel like we know," says Greene, "or understand something about the business that we don't think the market understands." The third focus is on doing their own research to back up and increase their conviction that their insight is correct.

"Facebook," says Greene, "highlights how we're a little bit different. We own a lot of Facebook and it's been obviously turbulent this year." According to Greene, based on in-depth research, the company has the wherewithal to grow durably and for a longer period than people may appreciate, despite fears that the core Facebook platform is slowing down and that regulations are going to hurt them. "It's actually an opportunity for us," he says. "We bought more of it during this pullback and we're very happy to be patient and wait for it to play out."

Another illustration of capturing market opportunity is Amazon.com, the top holding with a 14% weighting in the portfolio. "Amazon is a great example," says Greene, "of a company that in 2014 went through a period of pressure from the market. We were steadfast in our view and that's now paid off. Amazon is probably the highest quality company that I've ever looked at. They're attacking at least three huge markets -- retail, cloud computing and advertising -- and we feel like they have significant advantages in each one."

The tower companies are currently favoured in the telecom space because they have much better economics, much more durable positions, and the industry structure is better, says Greene.

"And whether you talk about  American Tower (AMT), or  Crown Castle International (CCI), for example," says Greene, "they're all great, they all have large tower businesses, although their investment strategies may differ."

One of the underlying factors that favour the tower companies, other than the stability, is what is fundamentally driving their business; the consumption of mobile data. You have the upgrade shift that's going to be happening from 4G to 5G technology -- known as fifth-generation mobile networks -- and that is expected to help the network carriers as well. Greene says they feel comfortable that the drivers of growth in mobile networks are going to be persistent over time.

In positioning the fund to navigate economic cycles, "we're much more focused on fundamentals to weather a storm," says Greene. "I can't predict macro, but if we go into a recession, the stocks are going to go down, it's going to happen. But we own companies where we feel the underlying structural, fundamental value will persist through a downturn and on the back side of it, will come out at least as strong or stronger."

Securities Mentioned in Article

Security NamePriceChange (%)Morningstar Rating
Alphabet Inc A1,202.46 USD1.97
Amazon.com Inc1,821.34 USD1.60
American Tower Corp223.85 USD0.41
Crown Castle International Corp144.13 USD0.85
Facebook Inc A186.76 USD1.66
Netflix Inc310.04 USD2.39

About Author

Diana Cawfield

Diana Cawfield  Diana Cawfield is an award-winning writer who has been a regular Morningstar contributor since 2000. Her numerous publication credits include the Toronto StarAdvisor's Edge and Chatelaine, as well as the Canadian Securities Institute's online educational services.