David Rolfe (Trades, Portfolio) of Wedgewood Partners Inc. is one of the GuruFocus gurus who’s beaten the Standard & Poor's 500 on most cumulative returns over the past two decades.
Rolfe is a value investor, looking for large-cap growth stocks with excellent potential and at least temporarily underpriced. He uses Porter’s Five Forces of Competitive Advantage to identify companies with sustainable moats.
This article is one in a semiseries examining the top stock-picking gurus (sometimes individuals and sometimes teams). The others are: David Tepper, Prem Watsa, Bill Ackman, Seth Klarman (by Rupert Hargeaves), Chuck Akre, Vanguard Health Care Fund, Yacktman Focused Fund, Jerome Dodson, Frank Sands, the Eaton Vance Worldwide Health Sciences Fund, PRIMECAP Management, Daniel Loeb, Bill Nygren and Mariko Gordon.
Who is Rolfe?
Born in 1961, Rolfe earned a B.S.B.A. in finance at the University of Missouri in 1985 and went on to gain a chartered financial analyst designation.
He followed up with registered representative positions at Westport Financial Group and Paine Webber Inc. before becoming an investment officer at Boatmens Trust Co. In 1992 he joined Anthony Guerrerio at Wedgewood Partners, where he became the chief investment officer. He is also listed, along with Guerrerio, in the FORM ADV Part 2A as one of the principal owners of Wedgewood.
What is Wedgewood Partners?
This St. Louis-based firm is listed as an investment adviser and within that classification calls itself a large-cap growth manager and offers a third-party investment program, subadvisory services to investment companies and private portfolio management.
At the end of 2016 it had $4.4 billion of assets under management and managed another $2.8 billion in other funds. It manages that capital on behalf of high-net worth individuals, institutions and investment companies.
With RiverPark Funds, it operates the RiverPark/Wedgewood Fund, which is available to institutions and retail investors. This fund invests in approximately 20 companies that offer market caps above $5 billion and are believed have above-average growth prospects.
Rolfe’s investment strategy and tactics
Rolfe and Wedgewood start with a broad perspective, which is a belief that “significant long- term wealth will be created by thinking, analyzing and investing as 'owners' in companies.”
In their FORM ADV, they also describe the strategy as focusing on large-cap focused growth product (LCG), and they create a portfolio of about 20 companies with strong prospects.
The process by which they identify companies starts with a qualitative and quantitative screening of 500 to 600 of the biggest public companies, based on market capitalization.
The quantitative screen looks for "past excellence," including exceptionally high profitability, such as double-digit bottom-line growth over a multiyear time frame.
The qualitative search aims to find "future excellence," which involves issues such as the sustainability of a company’s business model. Porter’s Five Forces of Competitive Advantage guides them through the sustainability screen. Those competitive advantages are: barriers to entry, threat of substitutes, buying power, supplier power and degree of internal rivalry.
A search might be expected to identify approximately 40 companies that exceed its profitability hurdles and qualitative requirements.
Once those companies have been identified, they wait until valuation matches expectations. They do not buy until a candidate company trades at a discount to its relative, absolute or historical growth rates.
Having made a purchase, they hold a company for the long term.
This graphic from the Wedgewood Partners Web site sums up their approach:
The Web site provides further information and insight. In taking what Rolfe calls an "Invest as Business Owners" approach, companies must meet these criteria:
- Domination of a product or service category because there are few, if any, substitutes.
- Long-term growth of revenues, earnings and dividends.
- Robust profitability, measured by ROE (Return on Equity), with minimal leverage.
- A management team that is both strong and oriented to shareholders.
While the words come across as confident, the Rolfe and Wedgewood approach doesn’t always work out as planned. In the First-Quarter 2017 Client Letter they note, “Our relative investment performance has struggled mightily since early 2013.” And what has been the problem? He writes, “What is notable has been an absence of huge winners. As a focused equity manager, what we don’t own among the largest stocks in our benchmark can hurt (and help) our relative investment performance.” In other words, the selectivity that is a hallmark, is also giving them time in the penalty box.
And in the Fourth-Quarter 2016 Client Letter, he observes that “those companies that chose to distribute the bulk, if not all, of their respective earnings since 2012 have been rewarded quite handsomely by Mr. Market.”
Turning back to the First-Quarter 2017 letter, here are excerpts from his thoughts on a few of the companies he holds:
- Apple Inc. (AAPL, Financial): “We continue to maintain a healthy overweight relative to the benchmark as we think the market continues to underappreciate Apple’s competitive positioning and long-term opportunities for profitable growth.”
- Edwards Lifesciences Corp. (EW, Financial): “On the valuation front, the stock looks attractive in relation to peers and the broader market, having pulled back almost a third from its highs, down to the middle of its historical valuation range.”
- Express Scripts Holding Co. (ESRX, Financial): “We sold our remaining stake during the Quarter. In our view, the company will be challenged to grow operating income beyond mid- to low single digits, as the market has matured, mostly due to industry consolidation, over the past few years.”
Rolfe’s statement about the absence of huge winners captures the essence of not only his strategy but also those of other gurus. Huge winners not only make up for losing and mediocre stocks but also help deliver above average earnings on a cumulative basis. And while Rolfe runs with a smaller portfolio than most other gurus (which requires high conviction stock picks), he uses a relatively common value approach to finding ideas.
Current holdings
As this GuruFocus chart indicates, financial and technology stocks make up half of the portfolio:
GuruFocus reports that the following stocks were the 10 biggest holdings in the portfolio (proportion of the portfolio shown following the stock symbol), as of March 31:
- Berkshire Hathaway Inc. (BRK.B, Financial) 9.38%.
- Apple Inc. 8.21%.
- The Kraft Heinz Co. (KHC, Financial) 7.24%.
- The Priceline Group Inc. (PCLN, Financial) 6.72%.
- Visa Inc. (V, Financial) 6.56%.
- Alphabet Inc. (GOOGL, Financial) 6.52%.
- Qualcom Inc. (QCOM, Financial) 6.03%.
- Schlumberger Ltd. (SLB, Financial) 5.79%.
- PayPal Holdings Inc. (PYPL, Financial) 5.43%.
- Core Laboratories NV (CLB) 4.69%.
Rolfe's favorite hunting grounds for winners are the financial and technology sectors, both of which have that potential. Kraft Heinz, a food company, is a surprising third in this company so perhaps it was picked up at bargain prices.
Rolfe’s performance
The following table, from GuruFocus, shows Rolfe’s year-by-year performance over the 10 years ending on Dec. 31, 2015:
And this table shows his performance in the years prior to 2006:
Note that while Rolfe’s performance is compared with the S&P 500 Index, the firm benchmarks itself against the Russell 1000 Growth Index.
A standout feature of these two tables is the variation with returns ranging from minus 38% in 2008 to plus 61% in 2009 – that’s nearly a 100% swing. Four of the past 22 years have rung in returns of more that 40%.
Conclusion
These results also highlight the need for what Rolfe calls "huge winners." Without the occasional big winner, his fund would not be a benchmark-beating entity, and he would not be a guru.
In the past twenty-some years, he has generated enough of them to suggest it is skill rather than luck that has earned him his place. From the other side, we might say he has cheated bankruptcy by finding enough big winners to avoid being swamped by the losers.
Rolfe, of course, has done better than avoid going under, much better. Over 20 years he has beaten the S&P 500 by an annual average 3 points, solidifying his standing as an investing guru.
Disclosure: I do not own shares in any of the companies listed in this article, nor do I expect to buy any in the next 72 hours.
