A Concentrated Portfolio Of High-Quality Growth Stocks

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Loomis Sayles Growth’s accomplished manager, research-intensive and deliberate strategy, and below average fees earn a Morningstar Analyst Rating of Silver.

Aziz Hamzaogullari has employed the same patient approach to growth investing since 2006, first at two large growth funds at Evergreen (later acquired by Wells Fargo) and at this fund since he joined Loomis Sayles in 2010. He’s backed here by a team of six analysts, three of whom have worked with him since 2006.

Hamzaogullari and company aim to invest in businesses with sustainable competitive advantages and profitable cash flow growth when they trade at significant discounts to intrinsic value. They analyze firms' balance sheets, industries, and their management teams' histories of capital allocation and shareholder alignment.

This process leads to a high-conviction, concentrated portfolio of 30-40 stocks. The fund’s sector weightings can differ significantly from those of its Russell 1000 Growth benchmark, and top holdings can comprise as much as 8% of assets. (

The fund’s returns have stood out as well. From Hamzaogullari’s May 2010 start through January 2018, the fund surpassed more than 90% of its large growth Morningstar Category peers and handily beat the Russell 1000 Growth Index. And despite the concentrated nature of the portfolio, the fund’s risk-adjusted returns (as measured by Sortino and Sharpe ratios) were similarly impressive over this period.

The fund has thus far lost 94% as much as its benchmark and just 82% as much as its typical large growth peer when stocks have declined during Hamzaogullari’s tenure. Stocks, however, haven't suffered many deep or prolonged pullbacks in this period. While the manager's previous charges fared well in the prior bear market, it remains to be seen how the strategy will fare in a valuation-driven sell-off. This still is a fine long-term holding, with below-average fees.

Process Pillar: Positive | Greg Carlson 02/20/2018 Manager Aziz Hamzaogullari takes a patient approach to growth investing. He primarily looks for three characteristics in companies: high quality, strong growth, and attractive valuation. To determine the level of quality, the manager and his team review a company's competitive advantages (such as a network effect, low costs, or a strong brand), balance sheet, and management team, and analyze its industry—they're looking for business models that are difficult to replicate, and management teams that efficiently allocate capital and are financially aligned with shareholders.

Within growth, the emphasis is on the sources and sustainability of profit and cash flow growth. For valuation, the team establishes the best, base, and bear cases for a company’s intrinsic value. It also performs expectation analysis to determine what is embedded in a company’s stock price and how the team’s thesis differs from the market; the team is looking for situations in which there is a disconnect between the fundamentals and embedded expectations.

The result of this process is a portfolio of 30-40 stocks, and the largest holding may comprise up to 8% of assets. The fund can be concentrated by sector, but the team argues that its holdings have a diverse set of business drivers. Stocks are sold when they reach the base case for intrinsic value or the team’s thesis is violated.

This fund bets heavily on its favorites; its 10 largest holdings comprised nearly 48% of assets at the end of 2017, and nearly 13% of the assets were invested in the top two holdings (Amazon and Facebook). This level of concentration amplifies the impact of blowups, but manager Aziz Hamzaogullari and his team have managed to minimize such occurrences thus far through their research-intensive process. Another result of the portfolio’s construction is that it stands out from its Russell 1000 Growth benchmark—active share has typically hovered around 80%.

Another factor that has lately helped the fund stand out has been its growing stake in non-U.S. stocks. That weighting rose from 5% early in Hamzaogullari’s tenure to a recent 15%, roughly triple the large growth Morningstar Category norm, due to the purchase in recent years of online retailer

The increase in non-U.S. holdings here has coincided with the March 2016 launch of another charge for the team, Loomis Sayles Global Growth. Given the concentrated nature of both funds, significant holdings overlap, and the fact that the team was already evaluating the non-U.S. competitors to its U.S.-based holdings, this new charge shouldn’t represent a hefty addition to the team’s workload.

Performance Pillar: Positive | Greg Carlson 02/20/2018 Since taking the helm of this fund in May 2010, Aziz Hamzaogullari has amassed a strong record, earning a Positive rating for Performance. Through January 2018, the fund gained an annualized 17.9%, surpassing more than 90% of its large growth Morningstar Category peers on the manager's watch. The fund also beat its Russell 1000 Growth benchmark—a difficult feat during this period—by an annualized 1.2 percentage points. The fund's risk-adjusted returns, as measured by Sharpe and Sortino ratios, were similarly impressive.

The fund has also delivered over rolling periods: It has outpaced its typical category peer and the benchmark in 100% and 97% of 32 five-year periods during Hamzaogullari’s tenure, respectively. The fund gained a bit more than the category norm and the index when stocks rose during the period, while losing just 82% as much as its typical peer, and 94% as much as the index, in declining markets. This attractive risk/reward profile is due in part to the outperformance of the mega-cap growth stocks at the top of the portfolio, including Amazon and Facebook.

While the fund hasn’t faced an extended downturn during Hamzaogullari’s tenure, he ably steered the funds now known as Wells Fargo Premier Large Company Growth and Wells Fargo Omega Growth to fine relative results in the October 2007-March 2009 bear market. The strategy hasn't yet faced a valuation-driven sell-off.

People Pillar: Positive | Greg Carlson 02/20/2018 This fund's accomplished skipper and stable supporting cast earn a Positive rating for People.

Aziz Hamzaogullari has managed this fund since May 2010, when he joined Loomis Sayles from Evergreen Investments (later acquired by Wells Fargo). At Evergreen, he ran the Omega and Large Company Growth funds from 2006 until his departure, generating strong relative results with the same approach he’s employed here. He joined Evergreen in 2001 as an analyst and was promoted to director of research in 2003 and portfolio manager in 2006. Prior to Evergreen, he was a senior equity analyst and portfolio manager at Manning & Napier Advisors. He invests more than $1 million in this fund.

Hamzaogullari is backed by a team of six analysts; three of the six (Brian Coyle, Peter Linnard, and Rayon Ward) have worked on the strategy with the manager since he founded it at Evergreen in 2006. The trio averages 17 years of investment experience. The other three analysts—Igor Chan, Larry Keegan, and Ryan Hill—joined the team in 2010, 2013, and 2014, respectively. The team’s compensation structure reflects its long-term investment mind-set: Bonuses are paid out based on group performance over three, five, and seven years, with each period equally weighted.

The team also began managing Loomis Sayles Global Growth at its 2016 inception.

Parent Pillar: Neutral | 08/03/2017 Paris-based Natixis Global Asset Management is the parent to a number of different asset managers globally, including Natixis AM in France and Loomis Sayles and Harris Associates in the United States. These affiliates have maintained a large degree of autonomy, both in operational terms and in terms of their investment philosophies. The quality of investment culture varies significantly from one subsidiary to another. The results of the teams at Loomis Sayles and Harris Associates, manager for the U.S. Oakmark funds, for example, are excellent, communications with investors are of high quality, and fund launches have been minimal. NGAM's latest acquisition, DNCA, has also begun improving its funds' fee structures since joining the fleet.

On the other hand, the results obtained by Natixis AM are more mixed, and its teams are less stable. Furthermore, in July 2017, the French financial regulator Autorité des Marchés Financiers imposed a EUR 35 million fine on Natixis AM for failings relative to its range of formula-based funds, arguing that the firm had overcharged investors and had failed to adequately disclose charges in the funds’ filings. The sanction on Natixis AM thus weighs negatively on our assessment of the group’s stewardship, but we recognize that strengths in other parts of the organization, particularly in the U.S.-based affiliates, partly compensate for this weakness, resulting in a Neutral Parent Pillar rating.

Price Pillar: Positive | Greg Carlson 02/20/2018 This fund charges below average fees across the board, earning a Positive rating for Price. Its Y shares hold 79% of the assets, charge 0.66%, and earn a Morningstar Feel Level of Below Average compared with other large cap institutional shares. The fund's A shares hold 14% of the assets and charge 0.91%, which earns a Fee Level of Low among front-load large cap funds. The N and C shares hold just 7% of the assets combined and each earn a Below Average.

The fund has also been relatively tax-efficient since Aziz Hamzaogullari took the helm in 2010; the amount investors in taxable investors gave up in returns over the past one, three, and five years through 2017 due to distributions was well below the large-growth norm.