Virtus Investment Partners, Inc. · NYSE:VRTS
Virtus Investment Partners — Sustainable Growth Advisers (SGA) — Q4 2023 Earnings Presentation
49 slides from Virtus Investment Partners's earnings presentation, December 2023
Slide 1: SGA U.S. Large Cap Growth Equity
SGA U.S. Large Cap Growth Equity Q4 2023 Portfolio Review
Slide 2: Firm Profile
Firm Profile Founded July 2003 Primary Portfolios Customized Portfolios • U.S. Large Cap Growth • U.S. Focused Growth Portfolios Managed • Global Growth • Global Focused Growth • International Growth • Emerging Markets Growth $26.5 Billion Firm-Wide* • $15.0 Billion U.S. Growth Assets Under Care • $
Slide 3: Sustainable Growth Advisers Distinguishing Characteristics
Sustainable Growth Advisers Distinguishing Characteristics Established Time-Tested Alignment to Stability & Performance Process Clients Continuity Pattern Outperformed in Team-based Broad equity Multi-generational volatile markets to approach and time- participation, co- team with very low provide f
Slide 4: Philosophy
Philosophy Identify those few Perform deep Wield valuation as Focus on a Invest with differentiated company an essential longer-term time conviction based global businesses research with element of horizon to take solely on that offer coverage by growth stock advantage of opportunity and predictable
Slide 5: SGA U.S. Large Cap Growth
SGA U.S. Large Cap Growth SGA vs R1G SGA vs R1G Gross Margin 58% 55% EPS Growth 15.9% 8.8% Cash Flow/Earnings 92% 84% Revenue Growth 11.7% 6.7% Net Debt/EBITDA 0.3x 0.2x Earnings Variability 8.8% 10.5% Quality Pricing Power Recurring Revenues Growth Growth Opportunity 2x Earnings and Revenue Financi
Slide 6: Higher Growth with Lower Variability
Higher Growth with Lower Variability SGA Portfolio Companies have historically grown their earnings at 2x the rate of the index with significantly less variability Annual Earnings Growth 43% SGA U.S. LCG vs. Russell 1000 Growth 36% 28% 26% 23% 23% 22% 22% 21% 16% 19% 17% 18% 15% 14% 16% 16% 15% 15%
Slide 7: Lower Risk By Most Measures – U.S. LCG
Lower Risk By Most Measures – U.S. LCG Downside Sharpe Sortino Capture Ratio Ratio 0 25 50 75 100 20th Percentile 43rd Percentile 38th Percentile 94% 0.70 1.18 Data is from 10/1/2008 to 9/30/2023. Please see performance slide included in these materials for the full performance presentation. SGA pai
Slide 8: Downside Capture
Downside Capture To compound long-term wealth, protect capital from losses Down-Market Years Since Inception Downside Capture SGA U.S. LCG WRAP (Gross) SGA U.S. LCG WRAP (Net) Russell 1000 Growth 4.7% 0 1.6% -1.5% 25 50 75 -28.9% -29.1% -31.1% -34.3% -36.3% -38.4% 100 15th Percentile 90% 2008 2018 2
Slide 9: Investment Team
Investment Team Tucker Brown Julian Cochran George Fraise HK Gupta Analyst, PM Analyst Co-Founder Analyst, PM SGA Since 2006 SGA Since 2019 SGA Since 2003 SGA Since 2014 Alexandra James Li, CFA Peter Madej, CMT Courtney Owens Lee, MD Davidson Analyst, PM Analyst Analyst Analyst SGA Since 2004 SGA Si
Slide 10: Four Flagship Portfolios One Qualified Company List
Four Flagship Portfolios One Qualified Company List US Global EM Intl. Growth Growth Growth Growth Since 2003 Since 2011 Since 2014 Since 2015 Focused version Focused version available available 10
Slide 11: Investment Approach
Investment Approach Structured to manage risk across three pillars Lower Lower Lower Business Risk Human Risk Price Risk Selectivity in Team-based Discipline in company approach valuation identification 11
Slide 12: Company Identification
Company Identification 1000+ ≈200 Universe of Thousands Research ≈110 Coverage List Qualified Company List Analysts seek the best Actively monitor ≈200 Continuous due diligence companies worldwide: companies that potentially (including valuation) of ≈110 conferences, trade shows, meet SGA criteria a
Slide 13: Research Process
Research Process 1 2 3 4 5 Idea Due Qualified Valuation Client Formation Diligence Company Portfolios List Analysts Deep Investment Relative to Concentrated present idea for fundamental concept other QCL 25-30 stock analysis to IC analysis, 10Y presented to IC companies portfolios financial for incl
Slide 14: Lower Business Risk
Lower Business Risk Key Investment Criteria High degree of predictability in their business Repeat Revenues Able to consistently Long duration of price profitably sustainable growth Pricing Growth Power Opportunity Management Financial Execute responsibly and Strength Strength High returns on capita
Slide 15: Reducing Business Risk
Reducing Business Risk Common SGA Business Models What We Seek Subscriptions Contractually reoccurring, essential services Companies possessing the characteristics we seek can be found across numerous industries with shared traits Consumables Frequently used & replenished products Toll Takers
Slide 16: Reducing Business Risk
Reducing Business Risk What We Avoid Lacking Pricing Power Commodity Producers (E&Ps, Miners) Given the selective nature of our Regulated Utilities approach, there are certain companies that typically do not Lacking Reliable Revenues or “Deep Cyclical” Manufacturers meet our requirements Trans
Slide 17: Alignment to Client Outcomes
Alignment to Client Outcomes Lower Human Risk Broadly-held equity Over 50% of employees own equity; no one individual holds >5% Co-Investment Across the team into SGA Funds Rewards tied to client outcomes Equity, performance shares and career opportunities determined by contribution to client perfor
Slide 18: Lower Human Risk – Cultural Values
Lower Human Risk – Cultural Values Embedded to manage behavior finance risks Maximizes process discipline Three Portfolio Managers Perpetuates deep Ensures rigorous research-first culture debate Analysts Dual Analyst First Coverage Equity Global Institutionalizes dissent Compensation Generalists Dri
Slide 19: Lower Price Risk
Lower Price Risk Earnings are easily manipulated Cash is What would you pay today for this future stream of predictable King cash-flows? All valuation models are proprietary; no use of sell-side estimates Valuations Volatility = Matter Opportunity Price volatility provides opportunities to increase
Slide 20: Intrinsic Value
Valuations 10-year DCF Current CFATS using 1 of 5 risk ÷ rates Market Capitalization Intrinsic Value INTERMEDIATE TERM Analyst Price Targets 2-3y price targets using multiples Cash Flow Available to Operating Sustaining Unfunded CAPEX Shareholders (CFATS) Cash Flows Acquisitions Obligations 20
Slide 21: Portfolio Construction
Portfolio Construction Stock Level Benchmark Consideration Extensive, first-hand research We never own a neutral conviction stock for diversification or active risk objectives Selective criteria Team vetting Bottom-up process with top-down review >110 Qualified Company List 25-30 Portf
Slide 22: Sell Discipline
Sell Discipline Fundamental Valuation Deterioration/ Forced Attrition Consideration Mistake Structural decline of a company’s We will trim or remove a position When a current holding becomes pricing power, competitive from the portfolio if it appears less attractive relative to another advantage, lo
Slide 23: Portfolio Holdings
Portfolio Holdings Communication Services 6.7% Industrials 3.8% Netflix 3.4% CPKC 3.8% Alphabet 3.3% Information Technology 25.7% Consumer Discretionary 12.2% Microsoft 6.4% Amazon 6.2% Intuit 3.9% Yum! Brands 3.3% Autodesk 3.4% Starbucks 2.7% Workday 3.4% ServiceNow 3.0% Financials 21.4% Salesforce
Slide 24: Performance - SGA Composite
Performance - SGA Composite Annualized Returns Q4 Since Trailing Returns 2023 1-Year 3-Year 5-Year 10-Year 15-Year Inception* SGA U.S. LCG WRAP (Gross) 13.9% 30.3% 3.7% 15.5% 12.7% 15.7% 10.7% SGA U.S. LCG WRAP (Net) 13.1% 26.5% 0.6% 12.1% 9.4% 12.3% 7.4% Russell 1000 Growth 14.2% 42.7% 8.9% 19.5% 1
Slide 25: SGA Performance Through Earnings Cycles
SGA Performance Through Earnings Cycles Russell 1000 Growth EPS % Change 40% 30% 20% 10% 0% -10% -20% 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 Periods of slowing growth expectations EPS Change Annualized Returns Jul 05 Jun 07 Jun 09 Jun 11 Jun 13
Slide 26: Portfolio Positioning Summary
Portfolio Positioning Summary Market Value SGA R1000G Diff. 3Y EPS Growth Rate 5-10% 10-15% 15-20% 20%+ $50 Billion + 85.6% 86.6% -1.0% Allocation 3% 42% 42% 13% $25 – 50 Billion 9.8% 7.3% +2.5% C/E* - 88% 95% 94% $15 – 25 Billion 4.6% 2.8% +1.8% EY* - 3.3% 3.0% 2.2% $5 – 15 Billion 0.0% 3.1% -3.1%
Slide 27: Portfolio Characteristics
Portfolio Characteristics Quality SGA R1000G Annualized Earnings Growth SGA U.S. LCG vs Russell 1000 Growth (p.a.) Gross Margin 58% 55% Cash/Earnings Ratio 92% 84% 25% SGA U.S. LCG Russell 1000 Growth Net Debt/EBITDA 0.3x 0.2x 22.2% Earnings Variability 8.8% 10.5% 20% 17.7% 15.9% 16.0% 15.1% 15% Cha
Slide 28: Revenue Growth
Revenue Growth Historical Revenue Growth 3Y Estimates 1600 SGA U.S. LCG 11.3% p.a. 1400 1200 1000 SGA U.S. LCG 800 11.7% p.a. Russell 1000 Growth 600 8.7% p.a. Russell 1000 Growth 400 6.7% p.a. S&P 500 200 S&P 500 4.7% p.a. 5.4% p.a. 0 Data as of 12/31/2023. Source: SGA Earnings and Revenues Estimat
Slide 29: Portfolio Valuation – Enterprise Yield
Portfolio Valuation – Enterprise Yield Enterprise Yield = (Op Cash Flow – Cap X – Acquisitions – Unfunded Obligations ) / Market Capitalization 7 6 5 4 3 2 1 0 2007 2017 2004 2003 2005 2006 2008 2009 2014 2010 2011 2012 2013 2015 2016 2018 2019 2020 2021 2022 2023 Current Enterprise Yield SGA U.S. L
Slide 30: Sustainability
Sustainability Enhancing the predictability of our companies and reducing portfolio risk Naturally ESG Integrated External ESG Client Preferences Compatible Process Research Focus on business Proprietary ESG ranking A supplement to our Tailored investment quality and risk system proprietary
Slide 31: Performance Tailwinds and Headwinds
Performance Tailwinds and Headwinds SGA’s approach produces a portfolio with strong growth through all phases of the business cycle. Periods when we tend to outperform: Periods when performance is likely to lag: Periods of moderating growth expectations Speculative or momentum-driven periods of
Slide 32: Next Decade Unlikely to Look Like the Last
Next Decade Unlikely to Look Like the Last Key Tailwinds of Economic and Corporate Profit Growth Over the Past Decade Being Replaced by Headwinds The Past: The Future: Globalization Deglobalization and greater supply chain control Peace dividend Geopolitical conflicts rising in multipolar wo
Slide 33: Earnings Growth Expectations – Russell 1000 Growth
Earnings Growth Expectations – Russell 1000 Growth Despite increasing pressures, market expectations remain high Consensus estimates for Russell 1000 Growth 2024-2025 EPS indicate expected double-digit growth Russell 1000 Growth EPS Growth Progression 2025 Growth: 18% 16% 16% 2024 Growth: 14% 15% Es
Slide 34: Earnings Growth Expectations – S&P 500
Earnings Growth Expectations – S&P 500 Despite increasing pressures, market expectations remain high Consensus estimates for S&P 500 2024-2025 EPS indicate quick expected recovery S&P 500 EPS Growth Progression 18% 16% 2025 Growth: 14% 13% Estimated EPS Growth 12% 2024 Growth: 10% 12% 8% 6% 4% 2% 20
Slide 35: Sales Stability & Gross Margins Not Rewarded
Sales Stability & Gross Margins Not Rewarded 180 160 140 120 100 80 60 12/22 03/23 06/23 09/23 12/23 Gross Margin (High minus Low) Sales Stability (High minus Low) Debt/Equity (Low minus High) 3-5YR Est. Growth (High minus Low) Source: FactSet, Russell. Data as of 12/31/2023. Graph depicts the facto
Slide 36: Russell 1000 Growth Index Concentration 1995-2023
Russell 1000 Growth Index Concentration 1995-2023 55% SGA U.S. LCG WRAP Composite Inception 7/1/2003 45% 35% Top 10 Securities Weight 25% Top 5 Securities Top 2 Securities 15% 5% 1997 2017 1995 1996 1998 1999 2000 2002 2003 2005 2006 2008 2009 2010 2012 2013 2015 2016 2018 2019 2022 2023 2001 2004 2
Slide 37: Russell 1000 Growth Index Concentration – Top 10
Russell 1000 Growth Index Concentration – Top 10 R1000G SGA Q4 Total Top 10 Companies Weight Weight Return Russell 1000 Growth Index Returns Apple 12.0% 0.0% 12.6% 80.0% 71.4% Microsoft 11.8% 6.4% 19.3% 70.0% Alphabet (Class A & C) 6.5% 3.3% 6.8% Total Cumulative Return % 60.0% Amazon 5.8% 6.2% 19.5
Slide 38: Impact of Interest Costs on Fiscal Policy
Impact of Interest Costs on Fiscal Policy Source: Strategas. It should not be assumed that future results will be reflective of past performance. 38
Slide 39: A Longer-Term Perspective On Sales Stability Factor Performance
A Longer-Term Perspective On Sales Stability Factor Performance SGA is focused on companies with greater predictability and lower variability in sales, earnings, and cash flow growth. Companies with a high level of recurring revenues tend to have higher stability in sales growth. Market environments
Slide 40: Is the Index Investable?
Is the Index Investable? Regulators’ View on Concentration • The R1000G fails to meet the “5/10/40” diversification rules for UCITS funds in Europe and does not qualify as a diversified vehicle by U.S. mutual fund standards which limits a portfolio to 25% in companies with greater than 5% weights
Slide 41: % of R1G Stocks Underperforming the Index Each Year
% of R1G Stocks Underperforming the Index Each Year 100% 90% 80% 69% 70% 65% 60% 57% 58% 57% 56% 55% 54% 54% 54% 52% 50% 47% 47% 46% 46% 46% 45% 44% 41% 40% 40% 30% 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 Source: FactSet. Data as of 12/31/2
Slide 42: Analysts / Portfolio Managers
Analysts / Portfolio Managers Tucker is a Principal, Analyst and Portfolio Manager on the SGA Investment Committee. Tucker has been with the firm since 2006. He has been co-manager of SGA’s International Growth Portfolio since its inception in 2015. Additionally, Tucker has investment committee lead
Slide 43: Analysts / Portfolio Managers
Analysts / Portfolio Managers HK is a Principal, Analyst and Portfolio Manager on the SGA Investment Committee. HK has been with the firm since 2014. He has been co-manager of SGA’s Emerging Markets Growth Portfolio since its inception in 2014 and of SGA’s Global Mid-Cap Growth Portfolio since its i
Slide 44: Analysts / Portfolio Managers
Analysts / Portfolio Managers Pete is a Research Analyst and a member of the Investment Committee. He is responsible for obtaining and disseminating relevant information on companies of interest from a wide variety of sources, as well as supporting SGA’s valuation model and related investment tools.
Slide 45: Analysts / Portfolio Managers
Analysts / Portfolio Managers Rob is a co-Founding Principal, Analyst and Portfolio Manager on the SGA Investment Committee. He also sits on SGA’s Executive Committee. Since starting the firm, Rob has been co-manager of SGA’s US Large Cap Growth and Global Growth Flagship Portfolios, from their resp
Slide 46: Client Portfolio Managers
Client Portfolio Managers Peter is a Client Portfolio Manager, responsible for supporting the firm’s client service and business development efforts, with Peter a focus on the firm’s broker/dealer and platform relationships. Additionally, he assists with the development and distribution of SGA’s cli
Slide 47: Annual GIPS Report – U.S. Large Cap Growth WRAP
Annual GIPS Report – U.S. Large Cap Growth WRAP Total Return 3 Year Standard Deviation Total Assets in Composite Russell 1000 Growth Number of Composite SGA Russell 1000 S&P 500 Total Firm Assets at Period WRAP Accounts % Period Before Fees** After Fees S&P 500 Index at Period End (USD Index Portfol
Slide 48: Material and Principal Risks
Material and Principal Risks Risks of Loss. The value of the portfolio investments may decrease in value. Economic Risk. Conditions affecting the overall economy, specific industries, or companies in which the portfolio invests can be worse than expected, and portfolio investments may fail to perfor
Slide 49: Definitions And Disclosure Page
Definitions And Disclosure Page Russell 1000 Growth Index (R1G): The Russell 1000® Growth Index is a market capitalization-weighted index of growth-oriented stocks of the 1,000 largest companies in the Russell Universe, which comprises the 3,000 largest U.S. companies. The index is calculated on a t
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