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For today’s Soundbites, we’re talking about the next decade for growth investors with Richard Bodzy, portfolio manager with Putnam Investments. We talked about sectors and names he likes, trends and technology, and why investment themes are so powerful.

Richard Bodzy (RB): Focusing on themes allows us to identify areas of the growth universe with consistent above-market growth. There are structural tailwinds in place in certain pockets of the growth universe that are long-dated, multi-year in nature and powerful. Examples include personalized medicine, the humanization of pets, and the shift from 4G LTE to 5G telecommunications infrastructure. Our approach is to invest primarily in what we like to call ‘enablers.’ So, for the three themes I highlighted, we own Lonza [Lonza Group AG, headquartered in Basel, Switzerland], which is an out-source drug manufacturer that helps to produce over a thousand different therapies. There’s a growing trend towards outsourcing production capabilities, and we believe Lonza is a significant beneficiary. Similarly, we own IDEXX [IDEXX Laboratories, Inc., based in Westbrook, Maine], which sells consumables into veterinary practices that need to be replenished based on volume of diagnostic tests. And we own American Tower [American Tower Corporation, based in Boston, Mass.], which is an infrastructure REIT where the Verizons, and the AT&Ts, and the T-Mobiles of the world hang their equipment. It’s a global company that should benefit from over $30 billion of aggregate spend necessary in the U.S. to make the transition to 5G network infrastructure.

Where he expects ‘new shoots.’

RB: Artificial intelligence has been a buzz phrase in the tech sector for a number of years but we’re starting to see stock movements and strategic actions from some of the world’s largest tech companies as it relates to AI. So, Microsoft, for example, invested $10 billion in the first quarter this year in a company called OpenAI. It’s an artificial intelligence startup that owns the ChatGPT tool. Microsoft is integrating generative AI into its search business Bing. But there’s potentially a much bigger opportunity that could come from embedding generative AI into the $40 billion Office 365 suite. Another theme I’d highlight is increased screen time. We have more devices and content is increasingly able to be streamed across those devices. So, we own a company, Universal Music [Universal Music Group, N.V., headquartered in Hilversum, Netherlands, and operationally headquartered in Santa Monica, Calif.] that collects a royalty each time you stream a song from one of their artists. We believe it’s a low double-digit grower for probably the next half decade, and largely insulated from economic fluctuations.

Positive developments in tech.

RB: We’re actually starting to see upside again to out-year consensus growth estimates, and that’s an encouraging sign. Positioning is also more favourable than it has been for growth stocks, with less broad-based ownership and crowdedness. One favourable trend I’d also highlight for growth stocks — and large cap tech stocks specifically — is that many of these companies are no longer just chasing an incremental dollar of revenue at any cost. Cost management actions should help ensure margin integrity and profitable growth. We absolutely believe the end result will be stronger bottom lines and operating marginal offsets to any potential hiccups in revenue. Salesforce.com, Meta, Google, Amazon, Microsoft, Zoom, Snapchat, Atlassian, Sirius Satellite Radio, Poshmark, Netflix and Twilio are just some of the companies reducing headcount and salaried expense over the next 12 months.

Other companies to watch.

RB: We like Cadence Design Systems [Cadence Design Systems, Inc. of San Jose, Calif.]. It’s the second largest player in the electronic design automation [EDA] market. The big picture thesis is that we’re at the very beginning stages of a multi-year shift in the growth rate for EDA companies. It’s a name that we’ve owned for a number of years and couldn’t be more excited about going forward. CoStar [CoStar Group, Inc., based in Washington, D.C.] is another name that we think will do very well over time. CoStar is a dominant commercial real estate provider of data, tools, listings, and online marketplaces.  This is a mid- to high-teens top-line grower, and we have a lot of conviction in the durability of growth and the underlying fundamentals of the business.

And finally, what’s the bottom line on growth investing?

RB: What day what month or what six-month period a stock will work and outperform is hard to know. However, advantaged business models with capable management teams that are properly incentivized are a powerful combination. So, stay invested in growth companies through the long term.

Well, those are today’s Soundbites, brought you by Investment Executive and powered by Canada Life. Our thanks again to Richard Bodzy of Putnam Investments.

Visit us at investmentexecutive.com, where you can sign up for our a.m. newsletter and never miss another Soundbite. Thanks for listening.

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