Morningstar Magazine - October/November 2017 - 75

in our investment universe has grown their
revenues maybe 5% to 6% per year. You
had returns well in excess of the revenue growth,
and valuations are up. In addition, the
operating margin increases that we had for several
years have moderated, and actually started
to go the other way.

companies here that typically keep their
market share in down markets and tend to pick
up some share in recoveries.
San Jose: We are also more bottom-up, and not
looking necessarily for themes. We've added

everywhere from building products to technology
this year to date, but the one area where
we've added a little bit more than other sectors
is financials, for the same reasons Andy
mentioned: interest rates and less regulation
and potential tax reform. We used the

It's not an easy period to find stocks, but on
the flipside, you have a large universe to pick and
choose from. You can always find companies
that are doing something a little bit special or
companies that are growing faster than the norm,
but you do have to be very prudent in terms
of what you pay and when you enter positions.
Where are you finding opportunities? Are there any
themes or trends?

Taylor: Our portfolios are fairly concentrated,
and we have a good mix of eclectic names; we
don't really jump on themes, per se. But in
technology, while valuations are up, there are
names in the SaaS [software as a service] software
space that are incredibly dynamic, taking large
amounts of market share. They're growing
at incredible rates-25%, 30%-while spinning off
free cash flow with business models that have
recurring, sticky revenues and loyal customers.
Adams: We also don't generally focus on one
sector versus others. That said, we think
there's an opportunity right now in the financial
space. We have built up some positions in
the banking industry, in particular asset-sensitive
names. The vast majority of their revenue
and profit is from the U.S., so if we do get any kind
of tax reform, they'll likely benefit. With deregulation, we could see a better environment for
the banks, on the M&A side. Then if we do see
interest rates start to move higher, over time that
should benefit the space as well.

A long-term differentiation of our portfolio versus
peers or the benchmarks is that we've always
had an overweight in the industrial space
and probably always will. We're looking for longterm, durable competitive advantages, and
typically these industrial companies fit well with
our strategy. Another thing that differentiates
us is that we focus on the upper Midwest, and
we've got a lot of well-managed industrial

When you find a phenomenal management
team that deploys capital in an efficient
manner ... that's pretty special-and something
that's very hard for smart-beta models
to capture.
JB Taylor

global.morningstar.com/Morningstarmagazine

75


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Table of Contents for the Digital Edition of Morningstar Magazine - October/November 2017

Contents
Morningstar Magazine - October/November 2017 - Cover1
Morningstar Magazine - October/November 2017 - Cover2
Morningstar Magazine - October/November 2017 - 1
Morningstar Magazine - October/November 2017 - 2
Morningstar Magazine - October/November 2017 - Contents
Morningstar Magazine - October/November 2017 - 4
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