The following is another excerpt from our recently published Dynamic Growth Opportunities (DGO) portfolio update, which is available here to download. Here, we highlight the top contributor and detractor in the portfolio, along with a brief commentary for each.
Raison D'être: Alpha Delivery
The first calendar quarter delivered the respite many hoped would arrive before year-end. Due to a confluence of factors we discussed in our last quarterly, the fourth quarter's drawdown caused the calendar year snapshot to finish in the red for the first time since 2008, on a total return basis. However, the patient was then rewarded once price converged closer to value at the start of 2019. Our DGO positions more than participated in this bounce-back, with 49 of our 52 positions finishing the quarter with net positive returns. We also took the opportunity to book our gains in one position, reducing our name count by one, all of which we explore in our contributors and detractors analyses below (gross stock price changes over 1Q2019 included).
Top Portfolio Contributor: Wayfair, Inc. Class A [W]: +64.8%
Wayfair has been a perennial member of this section of our quarterly, both as a past contributor and a detractor, which is an indication as to how polarizing the ongoing debate is regarding the long-term strategic runway for the company. At the core of the debate is whether a company focused on the online home furnishings market, where products skew to the larger/bulkier end of the spectrum (i.e. hard to ship), can be sustainably profitable long-term. Wayfair also faces the perpetual question whether it's capable of competing against Amazon long-term. W was able to stack up evidence to support the bull case of this debate during the holiday 4Q period, helping to prove that reinvesting for growth for a company with $6.8 billion top-line addressing a $600 billion market opportunity is a prudent use of cash flow. We see that current debate as still unsettled, with many of the pillars of our thesis foundation strengthening. As such, we continue to see an attractive, albeit bumpy, runway for Wayfair that should net to relative outperformance among its consumer discretionary counterparts.
Top Portfolio Detractor: CME Group, Inc. Class A [CME]: -12.1%
With around 11% representation in our index, financial services in the Russell 1000 Growth skews more towards payment services and investment services rather than banks and thrifts. We, therefore, keep a sharp eye on shifts in capital flows, which has disproportionately favored passive over active strategies, and on a continued shift towards electronic payments. As a global derivatives marketplace, CME Group is well positioned for the aforementioned continuation of asset flows, as those relying either on active management fees or cash equity trading commissions suffer thinning margins. CME stood atop the list of best performers in 4Q2018 due to a return in volatility and continued tailwinds to its diverse derivatives marketplace business. We view its pullback in 1Q2019 as nothing more than a give-back of some of the outsized gains, as 93% of its stock price decline can be explained by contraction in its trading multiple vs deterioration of fundamentals. We continue to see merit to owning CME relative to a constituent list of active mutual fund managers, online brokers (outside of Schwab), and the more equity-focused marketplaces that comprise our financial services underweights.