A Time-Tested Active Approach to Capture the Growth of the Future

Investors focusing on growth opportunities of 2021 can consider targeted exchange traded fund strategies to enhance their portfolios.

In the recent webcast, Growth Stocks: How to Invest Beyond Big Tech, Joseph Fath, Portfolio Manager, T. Rowe Price, outlined the current bull market, pointing to stocks that have rallied despite sharp earnings declines during 2020 as P/Es increased dramatically. While this might be seen as an increase in sentiment without a corresponding improvement in fundamentals, he argued that this is actually the typical pattern seen during a rebound from a sharp economic downturn.

However, Fath warned that it is important to acknowledge that a large uptick in earnings during 2021 is already somewhat priced into equity prices.

As investors consider growth opportunities, Fath highlighted several sectors that have ridden the wave of innovation and disruption in the economy today, including media, cloud computing, retail, financial technology, and a new breed of automobiles. These companies on the right side of change exhibit similar qualities, such as a unique and transformative invention, access to a total addressable market, great business models, a visionary founder or capable CEO, and trade at reasonable valuations.

Looking at T. Rowe Price’s investment philosophy, Fath argued that long-term growth in earnings and cash flow drive stockholder returns. The company takes a particular focus on ROIC profiles. Fath pointed out that sustainable double-digit earnings and cash flow growth are rare and are often underappreciated by the market, with only 1 in 3 companies growing sustainably at 10%+ and only 1 in 5 companies growing sustainably at 15%+.

“Capitalizing on differences between cyclical and secular growth is essential to successful growth investing,” Fath said.

“We believe robust fundamental research is the key to identifying long-term winners,” he added.

Fath also contended that strong management teams and thoughtful capital allocation have historically been able to combine to exploit secular trends and bridge cyclical difficulty. Consequently, investors may find that active management is critical to investing on the right side of change.

“Our global research platform provides broad and deep coverage, uncovering insights and analysis of global sector and local factors,” Fath said. “A bottom-up approach leads to high-conviction portfolios. Risk management is an integral part of our investment and portfolio construction process.”

Kevin Signorelli, Senior ETF Specialist, T. Rowe Price, added that investors can look to four actively managed ETF strategies based on time-tested investment strategies, the T. Rowe Price Blue Chip Growth ETF (TCHP), T. Rowe Price Dividend Growth ETF (TDVG), T. Rowe Price Equity Income ETF (TEQI), and T. Rowe Price Growth Stock ETF (TGRW).

The T. Rowe Price Blue Chip Growth ETF seeks to provide long-term capital growth by investing in common stocks of large- and medium-sized blue-chip companies that have the potential for above-average earnings growth.

The T. Rowe Price Dividend Growth ETF seeks dividend income and long-term capital growth by investing the majority of its assets in the common stocks of dividend-paying companies expected to increase their dividends over time.

The T. Rowe Price Equity Income ETF seeks a high level of dividend income and long-term capital growth by investing most of its assets in common stocks, with an emphasis on large-capitalization stocks that have a strong track record of paying dividends, or that are believed to be undervalued.

Lastly, the T. Rowe Price Growth Stock ETF seeks long-term capital growth and invests in companies that have one or more of the following: superior growth in earnings and cash flow, ability to sustain earnings momentum even during economic slowdowns, occupation of a lucrative niche in the economy, and the ability to expand during times of slow economic growth.

Financial advisors who are interested in learning more about investment ideas beyond big tech can watch the webcast here on demand.