An Active Fundamental Approach to the US Market

Our Fundamental Growth and Core Equity believes that the US equity market still offers a unique opportunity set of high-quality, long-term “compounder” companies that can be a core component of any strategic asset allocation. In this article, we share our philosophy and methodology – and how our strategy drives results.

State Street Global Advisors’ Fundamental Growth and Core Equity (FGC) team has been managing active fundamental equities since our first mutual fund was established in 1935. Our overarching value proposition is based on outperforming the market through concentrated portfolios of high-quality names with better-than-average earnings growth and lower-than average-volatility. Our investment philosophy is built around the combination of quality, durable growth and a reasonable valuation.

Despite the ongoing concerns about slowing global growth, persistent inflation and higher rates, we are constructive on “compounder” companies. These are globally competitive franchises, operating in a supportive political environment, that benefit from technological innovation, dynamic management teams, and disciplined capital structures. While there are always short-term fundamental risks, the long-term prospects for the highest-quality companies in the US market demand a sizable allocation, regardless of your tactical asset allocation call.

Differentiated Philosophy

Our focus on quality is supported by a proprietary framework that we call Confident Quotient, or CQ for short. Unlike traditional measures of quality that emphasize a simple combination of historical returns, earnings volatility and debt, we define quality on a forward-looking basis and focus on qualitative measures like the competitive moat, our confidence in the management team, the appropriateness of the capital allocation strategy, the transparency of the business model and the fundamental momentum of the business drivers. We leverage our long-tenured research team to quantify these “soft” metrics using our detailed Confident Quotient (CQ) framework.

We then marry this view on quality with detailed financial analysis, where our analysts produce a series of proprietary data around intermediate term earnings estimates and a long-term growth assessment. We also have an integrated sustainable investment approach built into the CQ framework that ensures we consider the implications of sustainability and the associated business risks when it comes to the durability of this growth outlook.

Lastly, we maintain what we call a reasonable valuation discipline. Valuation is more of an art than a science. Philosophically we think about discounted cash flows as the basis for establishing an intrinsic value for a stock, but in reality forecasting the long-term growth and returns is easier said than done. Our financial modeling gives us a feel for the intermediate-term earnings trajectory but our long-term through-cycle growth estimates, combined with our CQ-defined quality metrics, informs our level of conviction in the durability of growth and the associated price we are willing to pay.

Results Driven

Some called this approach GARP (growth-at-a-reasonable price) but we like to call it QARP (quality-at-a-reasonable price). While our core mandates have historically plotted slightly more “growthy” than the market overall, this has less to do with an affinity for growth investing and is more an artifact of the correlation between growth and quality. The fact is that our CQ-defined quality universe filters out lower-quality names that typically plot in the value end of the spectrum while our valuation discipline helps us avoid overpaying for growth at the other end of the spectrum. The result is a high-quality portfolio that provides long-term alpha generation and lower volatility.

Clients looking for core exposure with the benefit of alpha generation should consider our US Equity mandates. We offer high quality, low turnover, “sleep well at night” type of portfolios. Our concentrated funds don’t rely on style shifts or factor tilts to drive performance. They rely on fundamental analysis of durable companies with reliable management teams that reinvest for future growth. We maintain a disciplined valuation framework that gravitates towards long-term cash flow compounders but avoids valuation extremes. And we’re supported by an experienced global research team with a proven track record.

Three Flavors of US Active Fundamental Core

We offer three active US core strategies built on the same philosophy and research platform. All three flavors of active fundamental equity are benchmarked against the S&P 500 but have different levels of concentration to meet client needs. Our flagship concentrated strategy is the US Equity Select strategy, a core mandate benchmarked against the S&P 500 with 30-40 names and a tracking error in the 3-5% range. We have a similar strategy available as a US Mutual Fund called Elfun Trusts. This fund is one of the oldest mutual funds in the US and dates back to 1935. It was recently highlighted by both Barron’s1 and Investor Business Daily2 as one of the best performing US mutual funds in 2023 and 2024. Lastly, we manage a less-concentrated core strategy called US Multi-Style Equity. This strategy has approximately 100 positions, with a tracking error in the 2-5 range for clients that want to emphasize lower volatility over potential alpha.

The Bottom Line

As active fundamental managers with a long and successful track record, we have a unique perspective on how exposure to the US market can be best achieved. The widening performance differential between the best and worst US companies helps to justify this bias, revealing an investment landscape that is ideal for adding alpha through stock selection. As managers of concentrated, high-conviction portfolios, we help investors navigate the extremes in the market by avoiding overpriced growth stocks while also steering clear of lower-quality value traps. Our philosophy is based on “quality at a reasonable price,” which helps us construct concentrated, yet balanced, portfolios that provide better-than-average growth combined with the stability of lower-than-average volatility. Decisions are informed by our proprietary, forward-looking, framework for assessing quality.