As one of the five Senior Portfolio Managers in Darden Capital Management, I was asked last week to draft a performance update to be published in our annual newsletter to be shared with the Board of Trustees and DCM alumni. After writing the piece, I felt it provided a summary that might be helpful for prospective students interested in learning more about the inner workings of DCM and so I decided to post my write-up here:
Funded with $750,000 in 2010, the Rotunda Fund was the black sheep in DCM when we took over the reins on April 1, 2013. Its assets had grown only 13% between January 1, 2011 (date $750k was fully invested) and March 31, 2013 compared to a 31% increase in the S&P 500 TR over the same period. The patience of the Board of Trustees in the fund’s sustainability mandate is paying off this year with the fund returning close to 16% in the ten months since the current team took over on April 1, 2013. While the fund still has a small negative alpha (less than 1%) for the year, we believe we have positioned Rotunda to return positive alpha in the coming months and are in third place out of the five DCM funds on an absolute and relative performance basis year-to-date.
This turnaround in the fund’s performance has been the combination of solid fundamental stock selection by the 2012-13 team as well as smart additions to the portfolio by our team that have kept pace with the strong returns witnessed in the market. Top performers in the portfolio are:
- Gilead Sciences (GILD): Gilead is a rare breed, a large-cap biotech pharma that behaves like a small-cap growth stock, offering investors healthy growth with the safety of a well-developed product portfolio. The stock is up 121% since purchase on the back of strong sales of its HIV and hepatitis drugs and a rich R&D pipeline.
- Acuity Brands (AYI): A lighting and control solutions company that continues to benefit from higher energy efficiency products as energy and environmental concerns come to the forefront; increasing construction, renovation and tenant improvement projects as the global economy improves; and expansion into underpenetrated geographies and channels. The fund has realized a 116% gain on this position pitched by last year’s CIO Taylor Heaps.
- Hain Celestial (HAIN): Hain Celestial manufactures, markets and sells natural and organic food and personal care products that are gaining preponderance among consumers. Rotunda has enjoyed a 95% return on this position as Hain has continued to grow organically and through acquisitions. This performance was despite Carl Icahn’s sale of his position in September 2013 at levels 30% below the stock’s recent $99 peak.
The rosy picture painted so far is not to say that we haven’t had our setbacks. A couple of sales early in the year, namely Harman International and Fedex, cost us a lot of alpha as these stocks appreciated significantly after we sold the positions. However, we have tried to learn from our mistakes and have initiated a “mini-pitch” requirement from any team member recommending a sale to ensure that we put in a comparable amount of analysis into any sale as we would a purchase decision. This has reaped benefits with the eight sales we have made since the “mini-pitch” requirement yielding a 2% positive return on average per sale (i.e. stock is down since the sale).
Finally, I’d like to touch on the steps we have taken to learn more about sustainable investing and address misconceptions amongst other students about Rotunda’s mandate. Rotunda’s mission is not just to apply negative screens and stay away from “sin stocks” but rather to implement positive environmental, social and governance criteria to identify companies with long-term sustainable business models that will outperform due to their lower costs, better supply chain practices, decreased risks, etc. This is discussed in more detail in an op-ed I co-authored with Andy Larson that is included separately in this DCM Advisor and also published in the Darden student paper, the Cold Call Chronicle, in an effort to increase student interest for the fund.
Additionally, educating ourselves, as well as first years that attend our meetings, about the art of sustainable investing has been a critical part of the learning this year. Rich Evans teaches a case on sustainable investing in his Investments course that was very helpful. Andy Larson and Erika Herz have pointed us to a lot of sources for research and introduced the team to practitioners in the field. Amongst others, we spoke last year with Bruno Bertocci, Lead Portfolio Manager of UBS’ multi-billion dollar Global Sustainable Equity Strategy, and Bennett Freeman, SVP for Sustainability Research and Policy for Calvert Investment’s $12 billion AUM platform. These conversations were so helpful that we are bringing Bruno and Bennett down to campus in February to give the broader Darden community an opportunity to engage with thought-leaders in the space.
DCM has been my most fun and rewarding experience at Darden and I believe has significantly aided in my preparation for a career in investment management. I appreciate the opportunity I was given to serve as a Senior Portfolio Manager and hope I can give back as an alumnus to future fund managers some of what I have gained from my experience this year.
Senior Portfolio Manager