Equity markets rebounded during the 2nd quarter, despite chaotic newsflow highlighted by rising energy prices, a flattening Treasury yield curve, turmoil in emerging markets, President Trump’s tariff policies, and growing fears of a trade war between the US and China. The S&P 500 successfully navigated all this noise to generate a quarterly gain of roughly 3%. This left the benchmark index with a 2.7% year-to-date return, albeit still roughly 5.5% below its January peak.

Our Large Cap Growth strategy performed relatively well compared to both the S&P 500 and the Russell 1000 Growth Index last quarter. Somewhat unusually, we did better with our sector allocations than our stock selections. Our single best decision was to remain significantly underweight the Industrial Sector, which was the worst-performing group last quarter. Note that we are bottom-up stock pickers, so our caution on Industrials stems from our views of individual company characteristics and fundamentals rather than a “top-down” view of the economy or the markets. Unfortunately, many Industrials companies are manufacturers selling into global markets, so they sit in the cross-hairs of tariff threats, the strong dollar, and rising input costs. This is an unappetizing “triple threat” for our growth-oriented investment approach. In any event, we currently own only one Industrial stock in the portfolio (Waste Connections, WCN), leaving us with 2.4% exposure to a sector that has a 12% weighting in the Russell 1000 Growth Index.

Our portfolio’s top three contributors last quarter were Netflix (NFLX), Align Technologies (ALGN) and Twilio (TWLO). A portfolio holding since October 2016, NFLX is building a global, subscription-based media content platform and is a prime beneficiary of the secular – and accelerating – trend away from cable and satellite providers. ALGN is the market leader in clear tooth alignment systems, which replace traditional brackets and braces. Although the company previously focused on adult cases, they have been able to establish a strong foothold in the much-larger market for teenage orthodontia. Our position in Twilio (TWLO) was established in March 2018. Although the company is hardly a household name, they are the leader of the rapidly-growing cloud communications platform industry. They sell their products into large enterprises that have a need for a global and dependable cloud-based software to manage voice and text-based contact centers. TWLO is also growing revenues at an annual clip of over 40% per year, while outperforming expectations on gross margin. We like fast-growing companies with pricing power that are targeting large addressable markets.

Amazon (AMZN) was our fourth-biggest portfolio contributor during the second quarter. Our current position in the stock was first established in mid-2015, and we continue to like the company’s prospects. We think investors may be underestimating AMZN’s long-term growth opportunities, particularly in international markets. According to a recent research report from Doug Anmuth at JP Morgan, there were $14.3 trillion of global retail sales in 2017. E-commerce sales represented $1.8 trillion, or 12.6% of this total. Although the United States is the world’s largest economy, appoximately 75% of global retail sales and 67% of global e-commerce sales happen outside the U.S. Only 1/3 of Amazon’s retail sales occur in international markets, and Anmuth estimates that Amazon currently has a 9% market share of international e-commerce sales. Putting it all together, JP Morgan thinks that AMZN’s international retail sales could more than double over the next several years, from $106 billion in 2017 to $262 billion in 2022. We think that could prove to be a conservative estimate, especially if the global economy avoids a severe recession in the interim.

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