Finding enduring patterns

Stillwagon joined the TD fund’s subadvisor, Baltimore-based T. Rowe Price Group Inc., as vice-president in 2017, and took over as the fund’s portfolio manager (PM) in November 2019. “They don’t always recommend starting your PM career in the middle of a global pandemic,” he says. However, there’s plenty to recommend the $1.6-billion TD fund’s performance.

A number of investment products have experienced a meteoric rise since April, when equities markets recovered and businesses catering to online consumers and home-based workers saw their profit soar. But 2020 is barely an outlier for the TD fund: this is the third year returns have topped 30% since 2013, when the fund returned a staggering 46.79%, according to data from Chicago-based Morningstar Inc.

The T. Rowe Price version of the fund, launched in 1997 and offered in the U.S., originally was called the Media & Telecommunications Fund — “a true misnomer” relative to its holdings, Stillwagon says. Even now, there’s a significant technology allocation (48.20%) for a fund that doesn’t include “technology” in its name (although the U.S. name is the T. Rowe Price Communications & Technology Fund). The top five holdings are Amazon.com Inc., Alibaba Group Holding Ltd., Facebook Inc., Alphabet Inc. (a.k.a. Google) and Netflix.

Stillwagon took over portfolio management last year from Paul Greene, the TD fund’s portfolio manager since 2013. The two men became friends while covering the technology, media and telecommunications sector for different firms for a number of years.

Stillwagon began his career in finance as a consumer retail analyst at Goldman Sachs Group Inc. He then worked for hedge fund Maverick Capital Ltd. in the U.K., shorting European legacy media — on the brink after analogue ad spending collapsed during the global financial crisis in 2009 —before he began to cover the U.S. consumer internet industry.

“My investment process today reflects the pattern recognition that comes from analyzing companies across the extremes of [tech, media and telecom], from the structurally impaired model of analogue media to the growth stories of mega-cap tech,” Stillwagon says.

Part of that process is learning to recognize patterns that won’t change — a skill that may be especially important in a year of tremendous disruption. The pandemic has accelerated trends in online consumption, such as grocery delivery, that otherwise may have taken years.

The TD fund is built on high-conviction investments that often are held for more than a decade — the fund’s turnover is below 20% per year, Stillwagon says — and the top 10 positions comprise more than 50% of the fund.

“We’re always trying to strike the right balance between high conviction and responsible concentration,” Stillwagon says. In a volatile year like the current one, owning high-conviction names that have been portfolio mainstays, such as Amazon, can be reassuring. “In that sense, we’re that much more excited about Amazon’s pursuit of expedited free delivery because it’s all about what’s not changing,” he says.

While Amazon, Netflix and others clearly have benefited from pandemic lockdowns, Stillwagon is assessing the durability of the Covid-19 bumps: “Who is responding with commensurate investment to match the ‘new normal’ of e-commerce demand?”

Stillwagon points to Amazon’s massive investments in its warehouse space and delivery fleet and to Netflix’s expansion of its production capacity as positive signs for continued growth.

Stillwagon also looks for signs of permanent changes in consumer behaviour that are emerging as a result of the pandemic. Food and grocery delivery services such as DoorDash, Instacart and Amazon Fresh were given an unprecedented trial period for their operations during Covid lockdowns, he says, and demand has held up as initial virus restrictions receded.

Stillwagon attributes the TD fund’s steady long-term performance in part to its 70/30 split between growth stocks focused on digital disruption and communications infrastructure companies that enable the disruption. “That balance has served us well over the years — and particularly in 2020,” he says.

While the 70/30 split is a mainstay, the makeup of those baskets evolved as the growth portion shifted to e-commerce. During the equities sell-off in March, though, the 30% portion of the portfolio shone. The tower companies and cable providers — “the steady, subscription-based compounders” that make up the 30% basket — provided high-quality ballast, Stillwagon says. As spring lockdowns forced huge numbers of people to work, study and entertain themselves at home, internet providers were busy. “All of those dynamics amount to a free, daily, nationwide advertisement for broadband speed-up rates,” he says.

Shifts in consumer behaviour also may benefit the portfolio’s less disruptive portion. Prior to the pandemic, about half of Connecticut-based cable company Charter Communications Inc.’s customers used self-installation kits for their service, Stillwagon says. At the peak of the pandemic this spring, customers didn’t want technicians in their homes, so that proportion jumped to almost 90%, which allowed Charter to spend less on vehicles and technicians. “[That proportion] is not going back to 50/50,” he adds, “and that has potentially significant consequences for the long-term margins.”

Since the U.S. election and the string of positive news on Covid-19 vaccines that followed, many investors have been expecting a rotation out of growth stocks in favour of value after a prolonged period of outperformance for the former. Regulation also poses a potential headwind for some mega-cap tech stocks: the U.S. Dept. of Justice launched an antitrust lawsuit against Google in October, and some observers expect harsher treatment for big tech on Capitol Hill.

Stillwagon says he’s not worried about valuations for the TD portfolio’s holdings being too rich.

“We’re not seeing the really aggressive multiple inflation with the mega-cap internet platforms that can get pulled — in our view, unfairly — into the valuation bubble debate and into the rotation debate,” he says. “We’re choosing every day to hold a position in the same way we would choose to initiate a position.”

On the regulatory side, Stillwagon says, he anticipates the U.S. Federal Trade Commission will follow the Dept. of Justice and file an antitrust suit against Facebook. However, he points to U.S. antitrust precedent prioritizing the consumer over competition, adding that mega-cap tech platforms have the advantage of offering consumer-friendly, mostly free services.

The visits Stillwagon would normally undertake to discuss these and other matters with companies’ management teams have been reduced to Zoom calls, which offer one advantage: the CEOs are easier to reach at home.

Still, those calls don’t offer the same experience as spending days on a studio lot with Netflix’s content team, for example, trying to understand why the company is building studio capacity to rival what major production companies built over a century. Site visits help Stillwagon understand a company’s capital allocation and long-term strategy, he says.

“We’re not a ‘secret sauce’ type of investor. [Our strategy] is fundamental, bottom-up research and spending a significant amount of time with the management teams,” Stillwagon says. “That is a different skill set than trying to gauge whether a 200-million paid subscriber base will beat or miss by a couple hundred thousand in a given quarter. Both can be legitimate investment strategies — but you have to play to your strengths.”