Large Cap Growth
March 31, 2017
First Quarter 2017 – Performance Update
Top 10 Portfolio Holdings*
The CastleArk Large Cap Growth composite had a return of +9.15% gross and
+9.03% net for the quarter, exceeding the benchmark Russell 1000 Growth
Index return of +8.91%. Strong economic data and strong corporate earnings
pushed the equity market steadily higher during the quarter. Since inception,
March 1, 1999, the CastleArk Large Cap Growth composite has outperformed
with an annualized return of +7.43% gross and +7.01% net compared to +4.59%
for the benchmark for the period ending March 31, 2017.
CastleArk Large Cap Growth Performance*
Home Depot, Inc.
4.2%
Adobe Systems, Inc.
3.8%
Microchip Technology, Inc.
3.7%
Alphabet, Inc. – Class C
3.6%
UnitedHealth Group, Inc.
3.5%
Microsoft Corp.
3.4%
CME Group, Inc.
3.4%
Costco Wholesale Corp.
2.9%
Applied Materials, Inc.
2.9%
Delphi Automotive Plc
18.6% 18.1%
2.8%
34.1%
Percentage of Total Assets
18%
15.8%
Portfolio Characteristics*
13.3%
11.3%
12%
9.8%
9.2%
9.0% 8.9%
11.1%
10.6%
CastleArk
Large Cap
Growth
9.3%
Russell
1000
Growth
Index
7.4% 7.0%
Number of Companies
6%
4.6%
0%
1Q2017
1 Year
CastleArk (Gross)
3 Years
Annualized
CastleArk (Net)
5 Years
Annualized
Annualized
Since Inception*
Russell 1000 Growth Index
Past performance is no guarantee of future results.
*Inception 03/1/99
First Quarter 2017 – Portfolio Review
Signs of strength around the world, along with optimism for a new
administration, led to a strong stock market in January, followed by steady
appreciation in February as investors began to accept that global growth was
accelerating and a U.S. recession is still a few years off. There was more
volatility in March due to some signs of emerging weakness in the U.S. economy
and then the failure of Congress to overhaul the Affordable Care Act, however,
one global diffusion index of key economic data from 41 countries hit a new
post-recession high in mid-January, its highest level in a decade. Within the
U.S., corporate optimism bounced, Consumer Comfort hit a 10-year high, the rig
count is improving, unemployment claims are at a 43 year low, housing prices
are moving higher, small business optimism is spiking, manufacturing is surging,
S&P earnings are exceeding expectations, and real GDP is looking stronger.
Lower construction spending, consumer spending, and vehicle production and
sales did give investors pause, but global economies continued to show
improvement across the board. Globally, leading indicators are moving higher,
manufacturing is improving, the global rig count has turned up, China GDP is
nearly twice the growth rate of 2015’s low, and Europe is getting stronger.
48
609
Forward P/E
21.1x
19.4x
Historical EPS Growth
19.9%
17.4%
Expected Growth
14.6%
11.0%
Return on Equity
15.2%
21.5%
Debt/Capital
35.7%
47.3%
$116.6B
$176.4B
$27.6B
$9.4B
Weight by Market Cap
Median Market Cap
*Representative client portfolio.
Large Cap Growth Team
Robert Takazawa, CFA
Quentin Ostrowski, CFA
Michael Wu
Richard S. Drake, CFA
Contact
CastleArk Management, LLC
1 North Wacker Drive, Suite 3950
Chicago, IL 60606
Phone: 312.456.9682
For inquiries: [email protected]
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Large Cap Growth
March 31, 2017
First Quarter 2017 – Portfolio Review (continued)
Supporting this growth into the future is the continued stimulus provided by the
major central banks around the world. Expectations are for real U.S. GDP
growth of 3.0% in 2017. All of this will be boosted by the continued aggressive
approach to monetary policies throughout the world. Trump’s pro-growth
initiatives are not driving the economy but, if approved, should sustain the recent
acceleration into the future. While the end of March gave us the health care
overhaul failure, leading to concerns that tax reform and other Trump initiatives
may be delayed leading to a slowdown in U.S. growth, the evidence showed
continued strength in the U.S. and abroad. We believe the U.S. has reached a
point where its expansion is self-sustaining.
The markets moved steadily higher throughout the quarter with only a small blip
with the failure of the health care overhaul, pushing the Russell 1000 Growth
Index higher by +8.91% for the quarter. The CastleArk Large Cap Growth
Composite return exceeded the benchmark by +24 basis points. All of the
excess return resulted from stock selection. Sector allocation hurt overall relative
performance by -118 basis points. The large overweight in the Energy Sector,
the weakest sector with a large negative return, contributed more than all of the
negative sector allocation contribution, costing the composite -129 basis points.
Positive contributions from the large underweight/zero weight positions in the
two weakest sectors, Consumer Staples and Telecom Services, offset some of
the Energy negative contribution, adding +27 and +17 basis points, respectively.
The stock selection decisions had a significant positive impact during the
quarter, adding +147 basis points to relative performance. The impact came
mostly from two sectors: Information Technology and Consumer Discretionary.
Returns of more than 20% for seven of the fifteen technology holdings added
+119 basis points to performance, while returns of greater than 10% for seven of
the ten consumer discretionary holdings added another +72 basis points.
Negative returns for four of the eight Industrial holdings were more than enough
to offset the better than average returns of the other four, resulting in a -36 basis
point negative contribution, while all four Financial holdings trailed the sector
return for a -30 basis point negative contribution.
At the end of the quarter, eight of the worst contributing stocks during the
quarter remained in the portfolio, although four of these holdings were reduced:
Devon Energy, General Electric, EOG Resources, and Palo Alto Networks. The
sale of the General Electric position was completed during the first week of the
2nd quarter. TransDigm Group was sold, as was Bioverativ, a stock received in
a spin out from current holding Biogen. The positions in Continental Resources
and Dick’s Sporting Goods were increased during the quarter after weakness in
the stocks. United Rentals was added to the portfolio in January and the position
in JB Hunt was unchanged during the quarter.
First Quarter 2017
Best and Worst Contributors*
Best:
1.
Mobileye N.V.
Contribution
1.08%
2.
Adobe Systems, Inc.
.85%
3.
Applied Materials, Inc.
.60%
4.
Microchip Technology, Inc.
.49%
4.
Delphi Automotive Plc
.48%
.45%
6.
Panera Bread Company Class A
7.
Coach, Inc.
.43%
8.
Facebook, Inc. Class A
.43%
9.
Home Depot, Inc.
.42%
10. Veeva Systems, Inc. Class A
Worst:
.41%
Contribution
1.
Continental Resources, Inc.
-.25%
2.
Devon Energy Corporation
-.19%
3.
Dick’s Sporting Goods, Inc.
-.15%
4.
General Electric Co.
-.14%
5.
EOG Resources, Inc.
-.09%
6.
J.B. Hunt Transport Services, Inc.
-.08%
7.
Palo Alto Networks, Inc.
-.04%
8.
TransDigm Group, Inc.
-.04%
9.
United Rentals, Inc.
-.04%
10. Bioverativ, Inc.
-.00%
*Representative client portfolio. A complete list of security’s
contribution to performance and description of calculation
methodology is available upon request.
Contact
CastleArk Management, LLC
1 North Wacker Drive, Suite 3950
Chicago, IL 60606
Phone: 312.456.9682
For inquiries: [email protected]
Page 2
March 31, 2017
Outlook and Strategy
As we enter earnings season, global equity markets, including the U.S., remain quite buoyant. With President Trump’s
expansionary policy initiatives more in question today than any day since the election, and increasing skepticism that the
increase in the Leading Economic Indicators (LEI) will be followed by real economic growth acceleration, why is the
equity market so resilient? We believe it is the fact that there are several economic indicators that we are seeing that
have historically signaled economic acceleration. Timing is never precise, thus the rising investor anxiety. We suspect
that more definitive evidence of growth acceleration will appear within the next few months. The indicators we would point
to include: 1) the composite LEI just recently set a new record high, exceeding the 2006 prior high. In the past, the next
recession starts 4-8 years after the new record high; 2) bank lending standards have become more lenient the last four
quarters, which has historically led to increased business lending activity; 3) the Duke/CFO outlook survey indicates an
expected growth in capital goods spending of 8% over the next 12 months, a significant increase over the 1% increase
over the last 12 months; 4) U.S. Inventories continued to be reduced through the March quarter, with the month of March
showing little further reductions. With the flattening of inventory levels, production should rise just simply to meet final
demand, with possible additions to inventories boosting production even further. 5) International growth is accelerating,
and with broadening participation – Eurozone, China, India, Japan, Brazil, and Mexico, resulting in synchronized global
growth.
In the shorter term, we believe low investor expectations and enough economic improvement has occurred that the
“earnings season” is likely to produce more positive surprises vs. consensus investor expectations. We continue to
believe that earnings will lead valuations since Price/Earnings (P/E) ratios have already expanded, even in the face of the
Federal Reserve’s interest rate increases. We believe defensive/slow growth stocks will continue to lose their leadership
role in the market. Higher growth stocks will continue to see increasing valuation premiums vs. that paid for
defensive/slow growth stocks. Companies that have heavily invested in new products, productive capacity, and
distribution capabilities have the greatest opportunity for stock price appreciation as returns on invested capital (ROIC),
revenues, and earnings accelerate.
During the 1st quarter, three new stocks were added to the portfolio and two were removed. For each of the three largest
new holdings, our expectations and convictions exceed that of the consensus, giving us the opportunity for significant
outperformance should our expectations play out. The largest new investment was made in Citigroup; this leading
financial services company has lagged it peers due to its large international exposure, giving it less benefit from any
future U.S. tax cuts and less leverage off of an U.S. economic acceleration. We are attracted to the valuation and the
benefits Citigroup should receive from the global expansion we anticipate. United Rentals is the largest equipment rental
company in North America. URI has seen accelerating growth in recent quarters as construction and manufacturing pick
up. Due to its focus on rentals, the company gets the greatest benefits during the early cycles of an economic upturn.
U.S. Silica Holdings is involved in the production of industrial minerals, including fracking sand used to open rock
fissures and increase the flow rate of natural gas and oil from wells. This stock is a direct play on fracking, which has
accelerated due to the increase in oil prices which has led to an increase in drilling activity.
Disclosures:
Past Performance is no guarantee of future results. Performance for the CastleArk Large Cap Growth Composite includes institutional separately-managed accounts only and does not include individual
accounts we manage, nor accounts we managed in a third party sponsored “wrap fee” program.
Other information. This report contains information from market index providers or from other third parties. We believe this information is accurate, but we cannot guarantee it.
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