Tax Cuts and Deregulation
Ira Rothberg: The tax cuts and deregulation have ignited the U.S. economy's animal spirits. Consumer confidence, business confidence, they're both up. Corporate earnings are seeing material upward revisions, and one thing that's important to consider is that our portfolio has a particular skewness towards domestic companies, businesses that generate their profits here in the United States. As a consequence, the change in the federal corporate income tax rate from 35 to 21% is particularly meaningful. In fact, in 2018, we expect to see about 25% EPS growth for the portfolio on a look-through basis, 17% due to the fundamental performance of the businesses and 8% due to the tax cuts.
Performance of Concentrated Portfolios
Brian Macauley: Running a concentrated portfolio, owning about 20 to 30 securities, we're going to get performance that looks quite a bit different than a broad market index with 500 or 3,000 securities in it. What we're focused on is really the underlying performance of those businesses, and as long as those businesses are performing well for us over time, we don't get concerned about a period of underperformance. Nor do we get too enthusiastic about a significant period of outperformance. What we're really focused on is longer-term, three, five-year type returns.
Increased Weighting - American Woodmark
Ira Rothberg: In our experience, volatility is the friend of the active manager. In the first quarter of 2018, we added to our longstanding position in American Woodmark. American Woodmark is a manufacturer of kitchen cabinetry. They sell into the home improvement channel through customers like Home Depot, but also to nationwide home builders. The company's historical strength has been selling cabinetry at the middle end of the market, and they've done very well there.
But, towards the tail end of 2017, they made a transformational acquisition of a company called RSI Home Products, and RSI specializes at the entry level price point. We think there's significant demand from American Woodmark's existing customer base for that entry-level product at RSI. So this acquisition provides a very strong tailwind for the next several years as the company integrates that position and realizes synergies.
Top Holding - American Tower
David Rainey: American Tower has been in the Fund for many years and has been a top holding, and we would anticipate it would continue to be a top holding for many, many years to come. It is the beneficiary of three important trends that are going on in and around communications in this country and globally. We're seeing a transition from analog to digital, from wired service to wireless service and from voice to video. They support wireless carriers in the U.S. and in select emerging markets by renting space on their cell towers to those carriers so that they can provide the level of and kinds of service that customers around the globe are expecting. The company's been very ably managed for many, many years. They've actually recycled capital out of the U.S. into these emerging markets and are seeing equal or better rates of return on that capital. We think that the growth prospects of the business are very strong, and in fact, aligns very well with our five investment criteria. And, we think today it remains fairly attractive, fairly valued attractively, and should be an important holding for years to come.