Frontier follows a growth-at-a-reasonable-price approach. It seeks out firms with multiple potential catalysts to drive outperformance, such as growing market share and returns on capital, in addition to attractive valuations. It also considers turnaround stories: for instance, if a management team overhauls its corporate strategy. Frontier has a multiyear investment horizon and ultimately builds a fairly diversified portfolio of 70-80 stocks. Sector bets have typically stayed within 10 percentage points of the Russell Midcap Growth Index.
Wellington’s approach is more concentrated. It looks to own 30 firms with secular growth drivers that will drive compelling returns on invested capital over a several-year investment horizon. While Wellington wants stock selection to drive returns, the portfolio’s concentrated nature means that sector bets sometimes diverge more than 10 percentage points from the index.
The combined portfolio is more concentrated after subadvisor RS Investments was removed in December 2022. The number of holdings declined to 107 from 160 in the two years ending June 2024. While active share rose to 75% from 67% during the same period, it still ranked towards the bottom of the mid-cap growth category. The subadvisors also don’t have particularly distinct performance profiles from one another, with both tending to lose more than the index during down markets.
Despite the removal of former subadvisor RS Investments, which employed a sector-neutral approach, the end portfolio’s sector weightings still hover pretty closely to the Russell Midcap Growth Index’s. As of June 2024, the portfolio’s largest allocation was to information technology, at 25% of assets, though that was only marginally above the index’s 23%. The overweighting was driven by Wellington’s sleeve, which had sizable positions in CDW and Gartner (which was also a small position in Frontier’s sleeve). The overall portfolio also had a modest overweighting in healthcare.
Conversely, the combined portfolio’s biggest underweighting was to industrials, which at 15% was about 4 percentage points less than the index’s weighting. Both subadvisors were underweight, but Wellington’s was more pronounced, a byproduct of its more concentrated approach. Notable industrials positions include BWX Technologies and Builders FirstSource, which were owned by both subadvisors.
The portfolio has tended to be tilted toward lower-quality firms, according to Morningstar’s risk model. Moreover, the fund’s returns on invested capital and net margins have trended lower than the index. Despite these lower quality metrics, the portfolio has been mixed from a valuation perspective. As of June 2024, its price/earnings multiple was higher than the index’s.