Virtus Investment Partners, Inc. · NYSE:VRTS
Virtus Investment Partners — Sustainable Growth Advisers — Q2 2019 Earnings Presentation
33 slides from Virtus Investment Partners's earnings presentation, Oct 15, 2019
Slide 1: U.S. Large Cap Growth Equity 2Q 2019
U.S. Large Cap Growth Equity 2Q 2019
Slide 2: Firm Profile
Firm Profile Founded 2003 Distinguishing Institutional growth equity specialist focused on one philosophy, one strategy, one team Characteristics Minimal investment personnel turnover since inception Alignment of interests with clients via equity ownership and performance incentives Team‐bas
Slide 3: Distinguishing Characteristics
Distinguishing Characteristics One Team, One Philosophy and One Time‐Tested High‐Conviction Strategy A Performance Pattern that Helps Clients Maintain Conviction and Capture Long‐Term Wealth Creation Generated superior alpha during high volatility; strong absolute returns during low volatility; and
Slide 4: Our Investment Philosophy
Our Investment Philosophy Identify only those few differentiated global businesses that offer predictable, sustainable growth over the long term. Conduct deep company research with coverage by multiple analysts to enhance objectivity. Include Valuation as an essential element of growth stock selecti
Slide 5: SGA U.S. LCG Portfolio
SGA U.S. LCG Portfolio SGA U.S. LCG vs R1G* SGA U.S. LCG vs R1G* Gross Margin: 49% 41% EPS Growth: 14.9% 7.2% Cash Flow/Earnings: 97% 84% Revenue Growth: 11.7% 4.8% Debt/Equity: 72% 233% Growth Volatility: 6.1% 10.1% Quality Growth Pricing Power Over 2x Earnings and Recurring Revenues Revenue Growth
Slide 6: Higher Growth with Lower Volatility
Higher Growth with Lower Volatility Earnings Growth 1600 1400 SGA U.S. LCG 1200 14.9%/yr. 1000 800 600 R1G* 400 7.2%/yr. 200 0 Earnings Volatility 40% lower 10.1% 6.1% SGA U.S. LCG R1G* Source: Bloomberg, FactSet, Baseline, and SGA Estimates and Adjustments. Earnings Growth and Volatility data is th
Slide 7: Lower Risk By Most Measures – U.S. LCG
Lower Risk By Most Measures – U.S. LCG Sharpe Ratio Info. Ratio Downside Protection 0 25 Percentile 50 75 100 HIGH (0.00) Percentile: 16th Percentile: 31st Percentile: 11th 1st QUARTILE MEDIAN Rank: 20 of 126 Rank: 39 of 126 Rank: 14 of 126 3rd QUARTILE Sharpe Ratio: 0.42 Info. Ratio: 0.40 Downside
Slide 8: Lower Downside Capture – U.S. LCG
Lower Downside Capture – U.S. LCG 1‐Year 3‐Year 5‐Year 10‐Year Since Inception 0 25 Percentile 50 75 100 HIGH (0.00) Percentile: 10th Rank: 10th Rank: 8th Rank: 10th Rank: 11th 1st QUARTILE MEDIAN Rank: 24 of 242 Rank: 23 of 233 Rank: 18 of 227 Rank: 20 of 205 Rank: 14 of 126 3rd QUARTILE Downside C
Slide 9: Organization – Investment Team
Organization – Investment Team Gordon Marchand, CPA, CFA, CIC Rob Rohn George Fraise Founding Principal Founding Principal Founding Principal Since 2003 Since 2003 Since 2003 Experience: Officer, Director – Experience: CEO, PM, Analyst – Experience: Officer, Director – Yeager, Wood, Marshall W.P. St
Slide 10: One Philosophy | One Strategy | One Qualified Company List
One Philosophy | One Strategy | One Qualified Company List Multiple Portfolios SGA’s Qualified Company List >100 Growth Companies Selected through research process Primary Portfolios U.S. Growth Global Growth International Emerging Markets 25 – 30 Holdings 25 – 35 Holdings 25 ‐ 35 Holdings
Slide 11: Investment Approach
Investment Approach Three Pillars Selectivity Diligence Discipline In In In Company Identification Team‐Based Research Valuation Reduce Business Risk Reduce Human Risk Reduce Price Risk 11
Slide 12: Cast a Wide Net but Be Selective
Cast a Wide Net but Be Selective Assess thousands of companies Thousands for new ideas using screens, conferences, trade shows and leads from contacts Research Coverage List ‐ closely 200+ monitor 200+ companies that potentially meet SGA criteria and/or are direct competitors >100 Qualified Company
Slide 13: Reducing Business Risk: Selectivity in Company Identification
Reducing Business Risk: Selectivity in Company Identification Manage business risk by identifying those few businesses that offer strong, predictable, sustainable earnings and cash flow growth resulting from specific characteristics: Pricing Power Able to consistently price profitably Repeat Revenue
Slide 14: Reducing Business Risk: Companies Lacking Key Characteristics
Reducing Business Risk: Companies Lacking Key Characteristics Given the selective nature of our approach, there are certain companies which typically do not meet our requirements. Lacking Pricing Power Commodity Producers (E&Ps, Miners) Regulated Utilities Lacking Reliable Revenues or “Deep Cy
Slide 15: Reducing Business Risk: Qualified Company Archetypes
Reducing Business Risk: Qualified Company Archetypes Companies possessing the characteristics we seek can be found across numerous industries with shared traits. Frequently replenished, high‐margin Select Branded Consumer Packaged Goods branded consumables with growing usage or market penetration
Slide 16: Diligence in Research
Diligence in Research Company Selection Stock Selection >100 Companies 25‐30 Stocks Idea Business Qualified Company List Valuation Portfolio Formation Qualification Addition Consideration Continuous Due Diligence Investment concept Compare to other Buy when conviction and Analysts systematically IC
Slide 17: Reducing Price Risk: Multi-Faceted Valuation Discipline
Reducing Price Risk: Multi‐Faceted Valuation Discipline Cash Flow Available To Shareholders (CFATS) = Op Cash Flow – CapEx – Sustaining Acquisitions – Unfunded Obligations (pensions, legal) Current Enterprise Yield Intermediate‐Term Analyst Price Targets A proprietary measure of the free cash The Pr
Slide 18: Portfolio Construction And Risk Management
Portfolio Construction And Risk Management Stock Level SGA U.S. LCG Portfolio Benchmark Consideration Sell Discipline Extensive, first hand 25 – 30 holdings We never own a neutral Fundamental research conviction stock for deterioration Conviction based sizing diversification or active Se
Slide 19: Sell Discipline
Sell Discipline Fundamental Deterioration or Mistake Structural decline of a company’s pricing power, competitive advantage, long‐term secular growth rate, or any other fundamental erosion that calls into question the long‐term sustainability of a company’s cash flow growth will lead us to sell a
Slide 20: Portfolio Holdings – U.S. Large Cap Growth
Portfolio Holdings – U.S. Large Cap Growth Communication Services 10.6% Consumer Staples 6.5% Information Technology 30.2% Walt Disney 4.0% Estee Lauder 3.6% Visa 4.5% Alphabet 3.9% Mondelez 2.9% Microsoft 4.5% Facebook 2.7% Salesforce.com 4.0% Health Care 18.6% Autodesk 4.0% Consumer Discretionary
Slide 21: SGA Performance – SGA U.S. LCG WRAP Composite
SGA Performance – SGA U.S. LCG WRAP Composite Since Rolling Data Q2 2019 YTD 2019 1 – Year 3 – Year 5 – Year 7 – Year 10 – Year Inception SGA U.S. LCG (Gross) 5.4% 23.4% 19.9% 18.3% 14.4% 15.3% 16.5% 7.9% SGA U.S. LCG (Net) 4.6% 21.7% 16.4% 14.9% 11.1% 11.9% 13.1% 4.7% Russell 1000 Growth 4.6% 21.5%
Slide 22: Portfolio Balance – U.S. Large Cap Growth
Portfolio Balance – U.S. Large Cap Growth Earnings Growth Rates Market Capitalization SGA U.S. LCG R1G* Difference 3 Year Est. 5 to 10 10 to 15 15 to 20 20+ $50 Billion + 81.1% 68.1% +13.0% Growth Rate (%) $25 – 50 Billion 15.3% 14.7% +0.6% Percent 20% 44% 24% 12% $15 – 25 Billion 3.6% 6.7% ‐3.1% Po
Slide 23: Portfolio Characteristics – U.S. Large Cap Growth
Portfolio Characteristics – U.S. Large Cap Growth Growth SGA U.S. LCG EPS Growth R1G* Quality SGA U.S. LCG R1G* 2000 13.8% ‐12.3% C/E Ratio 97% 84% 2001 10.0% ‐6.1% Gross Margin 49.2% 41.5% 2002 14.4% 17.3% Debt/Equity 72% 233% 2003 14.7% 10.8% Growth Volatility 6.1% 10.1% 2004 16.1% 15.7% 2005 15.2
Slide 24: Portfolio Revenue Growth
Portfolio Revenue Growth Historical Revenue Growth 1100 SGA U.S. LCG 9.8%/year (Est.) 900 SGA 11.7%/year 700 500 R1G* 7.8%/year (Est.) 300 R1G* 4.8%/year S&P 500 5.7%/year (Est.) 100 S&P 500 3.9%/year ‐100 Source: SGA estimates, Bloomberg, and FactSet as of 6/30/19. *Abbreviated for Russell 1000 Gro
Slide 25: Portfolio Attractively Priced on Cash Flow Basis
Portfolio Attractively Priced on Cash Flow Basis 8 6 4 3.4% SGA U.S. EY 2 2.0% 10 YR Bond 1.4% EY Minus 10 YR Bond 0 ‐2 ‐4 ‐6 Enterprise Yield = (Op Cash Flow – Cap X – Acquisitions) / Market Capitalization Data as of 6/30/19. U.S. data for SGA’s longest tenured account. The record presented for the
Slide 26: SGA’s ESG Initiatives
SGA’s ESG Initiatives SGA’s ESG Principles Statement: SGA has always focused the investment of its clients’ capital in a selective number of high quality companies that have the ability to provide sustainable growth over the long‐term. Our team recognizes that environmental, social and governance (E
Slide 27: Analysts / Portfolio Managers
Analysts / Portfolio Managers George is a Founding Principal, an Analyst, a Portfolio Manager and a member of the Investment Committee. He is also a member of the firm’s Advisory Board. George has been with the firm since 2003. Prior to founding Sustainable Growth Advisers with Gordon Marchand and R
Slide 28: Analysts / Portfolio Managers
Analysts / Portfolio Managers Alexandra is an Analyst, Portfolio Manager, Principal and a Tucker is an Analyst, Portfolio Manager, Principal and a member of the Investment Committee. Alexandra has been member of the Investment Committee. Tucker has been with with the firm since 2004. Prior to joinin
Slide 29: Analysts
Analysts Luying is an Analyst, Principal and a member of the Jon is a Research Analyst and a member of the Investment Investment Committee. Prior to joining Sustainable Growth Committee. Prior to joining Sustainable Growth Advisers in Advisers in 2017, Luying was a financial business analyst at 2019
Slide 30: Client Portfolio Managers
Client Portfolio Managers Steve is a Client Portfolio Manager and member of the Investment Committee, responsible for client and consultant communication. Steve has been with the firm since 2014. Steve was employed by Russell Investments as a Portfolio Manager and Research Analyst for approximately
Slide 31: Annual Full Disclosure Presentation – U.S. LCG WRAP
Annual Full Disclosure Presentation – U.S. LCG WRAP Total Return 3 Year Standard Deviation Number of Composite Russell 1000 Growth Total Assets in Composite at Period Total Firm Assets at Period End (USD WRAP Accounts % of Period Before Fees After Fees Russell 1000 Growth Index S&P 500 Index SGA Com
Slide 32: 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
Slide 33: ACA Verification and Performance Examination Report
ACA COMPLIANCE GROUP PERFORMANCE SERVICES Verification and Performance Examination Report Mr. Gordon M, Marchand, CPA, CFA, CIC Sustainable Growth Advisers, LP We have verified whether Sustainable Growth Advisers, LP (the "Firm") (1) has complied with all the composite construction requirements of t
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