First Quarter 2017 Portfolio Manager Comments
Large Cap Core Equity Portfolio
For the first quarter ending March 2017, our Large Cap Core composite returned 6.72% versus 6.03% for the Russell 1000 Index and 6.07% for the S&P500. For the one, three and five year rolling periods ending March 31st 2017, our Large Cap Core composite returned on an annualized basis, 23.17%, 12.30%, and 15.25% respectively versus the Russell 1000 Index’s one year return of 17.43%, three years of 9.99% and five years of 13.26%. The S&P 500 returned on an annualized basis, 17.17%, 10.37%, and 13.30% for the one, three and five years respectively.
Contributors for the quarter included technology stocks such as DXC Technologies – DXC +42bps, which confirmed an attractive 2017 and beyond guidance benefiting from the completion of Hewlett Packard Enterprises – HPE spin merger to form DXC Technologies. Broadcom Ltd. – AVGO + 37bps and ASML Holding NV – ASML +36bps, both benefited from earnings surprises to the upside. Delphi Automotive PLC – DLPH +32bps beat fourth quarter estimates significantly on both top line growth and margin, with better than expected guidance for 2017. Huntington Ingalls Industries Inc. – HII +28bps released strong fourth quarter operation results driven by better than expected topline / margin performance. In addition, shipbuilding received an expected boost in the House version of the budget and supplemental spending.
Detractors were in Healthcare, specifically Envision Healthcare Corp – EVHC – 22bps missed earnings estimates for the quarter and lowered fiscal year 2017 guidance. We held on to Envision Healthcare. The stock appears inexpensive, perhaps overly discounting residual operational problems, but we are cognizant that they are partly hostage to changes in overall health care spending and federal distribution of funds to the states. Apple Inc. – APPL -16bps cost the portfolio a relative 16 basis points due to our underweight relative to the benchmark. Energy names such as Devon Energy Corp – DVN – 13bps underperformed due to weak oil prices as inventory data in the US continued to disappoint. Bank of New York Mellon Corp – BK – 9bps, as the Investment Management segment was weaker than expected, which was attributed to forex translation, fixed income, and relatively weaker post-election positioning. We sold Bank of New York Mellon Corp as we saw the potential for increased price competition in their basic custodial services. Westinghouse Air Brake Technologies Corp – WAB – 9bps as 2017 guidance was lower than expected due to the delays in freight aftermarket recovery. We continue to hold Westinghouse Air Brake Technologies as we think rail traffic will pick up beyond the sluggish fourth quarter pace.
CONCERNS & OUTLOOK:
After the strong stock market performance, we see risk to the downside for equities. We believe the markets are already pricing in some expectations of tax cuts, infrastructure spending, and potential business stimulus from deregulation. While these expectations may come to fruition, there are clearly concerns regarding the Trump administration’s ability to pass any meaningful legislation. Combined with geopolitical instabilities in Korea, Syria, France, and Russia, along with the ever present threat of terrorist disruptions, further gains in stocks might be limited.
Going forward, we believe these concerns will pass as the administration has already met with Russia (regarding Syria) and China (regarding North Korea) to ease tensions, and the French election should result in little change in the country’s position within the EU. While there will not likely be expedient action in Congress regarding tax reform and infrastructure spending, the economy is on sounder footing and the urgency for monetary stimulus has diminished, and in fact, a late-2017 timeframe for action would drive a strong start to the economy into the new year. With this, steady job creation, improved business optimism, and a solid US consumer balance sheet, we see steady growth ahead.
Portfolio commentary is based on the Large Cap Core composites. Performance is gross of fees. Contribution detail is based on a representative portfolio. The holdings identified do not represent all of the securities purchased or sold for advisory clients. Past performance does not guarantee future results. Any securities mentioned are provided for informational purposes only and should not be deemed as a recommendation to buy or sell. Portfolio holdings are subject to change at any time. The top contributors and detractors are presented to illustrate examples of the Large Cap Core’s investments and may not be representative of the portfolio’s current or future investments. Portfolio holdings are as of quarter end and may change at any time. Security selection shows how individual securities within the portfolio performed relative to the benchmark. It is calculated using Eikon and GICS Sectors. To obtain a list showing the contribution of each holding to the composite’s overall performance at the end of the most recent publicly available disclosure period, contact Keith Graham at 212‐247‐2382.
Suffolk Capital Management, LLC
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