The portfolio performed relatively strongly in 2019 and continued to do so through the recent turbulence. What have been some of the drivers of that? Any lessons learned?
We continue to focus on our core investment philosophy around quality, sustainable growth and reasonable valuation. The bulk of our relative performance in 2019 was driven by stock selection. The top stock drivers were broadly based across technology, industrials, real estate, healthcare, communication services, financials and consumer staples. The common thread was a high level of conviction by our analyst team around the idiosyncratic aspects of the investment thesis for each name.
With the market up over 30% last year, we utilized our valuation discipline to trim the positions of many names that had performed well. We believe that positioned us well coming into 2020. We used the market sell-off to re-allocate to some of our highest conviction names at what we consider to be attractive valuations. Our goal is not to optimize short-term performance, but to focus on positioning the portfolio for the long term. We believe this will allow us to continue to compound at a rate in excess of the market, while doing so with lower risk given our focus on quality and durability.
Even before COVID-19, concerns were expressed about the length of this economic cycle and the ability of equities to continue higher. Has your outlook for equities fundamentally changed?
As COVID-19 has become a global pandemic, the macro implications have expanded. What began as a regional crisis has progressed to a point where entire countries are on lockdown, with businesses not considered “essential” shut down by state governments. With many citizens in self-isolation, consumer spending on retail, travel, dining and entertainment has plummeted. While Fed rate cuts in response to the crisis are supportive of the economy, they have materially hit financial stocks as net interest income is negatively impacted.
The macro slowdown has also intensified the disruption in the crude oil market and the energy sector has been devastated. Overall, companies across the board have less visibility on revenue and, in many cases, have cut capital spending and removed financial guidance. We have lowered our own earnings estimates for individual companies and for the market overall. We began the year looking for mid-single digit earnings growth for the S&P 500 but have cut our outlook to a material decline for 2020, while also taking down expectations for 2021. It’s hard to say how much lower earnings will decline, but we are considering 2020 to be a lost year for earnings. We are focused on establishing where earnings can get back to in 2021 and 2022 as we hopefully move past this situation and return to a more normalized environment.