Positioning of the Meritage Growth Strategy

The Meritage Growth Equity strategy emphasizes high quality stocks with above average Cash Flow Return on Invested Capital (CFROI). Relative to growth benchmarks, our process has led us to overweight the Information Technology and Healthcare sectors, and underweight Consumer Discretionary. The portfolio also has zero weight in Utilities, Materials, Energy and Real Estate.

Growth strategies in general have held up better this year, getting off to a stronger start and performing in line with the general market since the coronavirus related decline began in late February. Having less exposure in the more traditional cyclical sectors that are more dependent on the economy has been helpful.

Specific to our strategy, we have continued to hold several stocks in our Health Care sector that are part of the Life Science Industry, for example, Bio-Rad, Illumina, Agilent, Danaher, and recent addition, Repligen. All of these should benefit from an increased awareness to their contribution to health care research on viruses and other deadly diseases and a coincident increase demand for research tools including genetic sequencing equipment and consumables.

Tactical adjustments recently in light of the coronavirus pandemic included the sale of health care companies who would be negatively impacted by a moratorium on elective surgery, for example Intuitive Surgical. We also have conviction in our Technology overweight in Technology, believing that these companies will stand a better chance of maintaining a high CFROI and bounce back more quickly than other sectors. This includes healthy exposure to some of the largest cap names in the sector.

Lastly, we have built a larger cash cushion than we normally carry in anticipation that there will be significant opportunity to invest in high quality companies that have previously been over-valued. In the meantime, we expect the extreme volatility to continue, which will include periodic relief rallies before an ultimate bottom is made. We wish we could be more definitive of when that will be. We are confident, however, that the inevitable recovery will begin well before the flow of news turns decidedly better.