T. Rowe Price US Large Cap Growth Equity

T. Rowe Price US Large Cap Growth Equity is one of the more concentrated portfolios at T. Rowe Price. Jon looks for companies that can generate above average growth for the next three to five years, determined by how much free cash flow they can produce. He believes that most large-cap growth companies revert to the mean over time, so want to capture outperformance in that period. He is happy to have a small part of the portfolio in firms exhibiting lower but sustainable growth.

The managers can choose from a universe of approximately 500 companies. This universe is first analysed with a screen, which looks for a minimum of 10% + inflation earnings growth. Jon recognises that this is a high benchmark and whittle the list down to around 150-200 companies.

From here, T. Rowe Price’s analyst team do their proprietary fundamental analysis. This will involve going through the stock’s financial reports to confirm the screens have interpreted the company’s numbers correctly and looking for where the company is performing and whether it is able to grow into the future. T. Rowe Price has an enviable resource of equity specialists to help produce this work.

Jon will then stress test the stock’s investment thesis to confirm the analysts’ expectations. He does this in partnership with the analysts, making sure they have done the work on the stock too, not simply picked their best ideas. Work is conducted on ESG inputs at this stage too. There will then be a valuation analysis to assess the estimation of what is a good price for the stock. This leaves around 80-100 companies that are worthy of consideration.

The final portfolio will consist of around 60-75 companies that have been selected based on which make for the most compelling opportunities over a three-year period, as well as the risk they offer. The top ten stocks will be high conviction and account for around 50% of the portfolio. A more even spread and smaller weightings across the remaining 50+ stocks helps with risk management through diversification, without sacrificing potential rewards.

Alongside the risk assessment inherent in fundamental analysis, the managers have a ±5% relative position limit to the Russell 1000 Growth index. There are sector limits too: Jon cannot have less than half the benchmark weight of a sector, nor more than three times its weight. He also can’t buy anything the small and medium-sized funds team own. The fund has done well in a variety of markets but has underperformed when value stocks have outperformed.

ESG - Integrated
For Jon and the team, ESG factors are one component of the investment decision, meaning that they are not the sole driver of an investment decision, nor are they considered separately from more traditional analysis. Rather, they enhance investment decisions. In order to systematically evaluate ESG factors, the investment team follows a three-step process - identification, analysis and integration. It will initially use ESG screening tools (including a proprietary ESG scoring model, Responsible Investing Indicator Model (RIIM)) to identify companies with ESG issues. T. Rowe’s team of dedicated ESG specialists will then apply further analysis to companies flagged by the screening process, which can include engagement initiatives and proxy voting recommendations.

The process allows Jon to understand any ESG risks present in the portfolio and to integrate the analysis into their investment strategy. The main ESG focuses are Responsible Investing (RI) and Governance.