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These Gurus Focus on Concentrated Growth Investing

- By Robert Abbott


"At Sands Capital, we believe that innovative businesses, able to sustain growth for many years, are essential building blocks of wealth creation." From the Sands Capital web site



Ninth place on the GuruFocus Scoreboard currently belongs to a father-son duo: Frank Sands (Trades, Portfolio) Sr. and Frank Sands (Trades, Portfolio) Jr.


Their place on the scoreboard reflects their 10-year performance compared to all the other investing gurus followed by GuruFocus. Their average annual returns over 10 years come in just shy of 10%, but over 25 years they do even better - 11%.

At their firm's web site, the Sandses say, "We are staff owned, committed to our independence, and we do only one thing: growth investing." It's that last phrase, "growth investing," that commands most of our attention since the Sandses not only take a growth approach but have doubled down by maintaining a concentrated portfolio of growth stocks.

This article is one of a number on the investing gurus: Others include David Tepper, Prem Watsa, Bill Ackman, Seth Klarman, Chuck Akre, Vanguard Health Care Fund, Yacktman Focused Fund and Jerome Dodson.

Who are the Sandses?

Sands Capital Management is led by a father and son team. Frank M. Sands Sr., CFA (chartered financial analyst), founded the firm and is currently its chairman. Frank M. Sands Jr., CFA, is chief investment officer and CEO.

Frank Sands Sr. began his financial career in 1969 as an oil industry analyst after receiving an MBA. Three years later he moved to David L. Babson & Co. where he learned growth stock investing. That was followed by a stint as chief investment officer at Folger Nolan Fleming Douglas, a money management firm. He made his last move in 1992, when he set up Sands Capital Management in Arlington, Virginia (his hometown). In going out on his own, he was entrusted with $60 million in assets from Folger Nolan's institutional and high net-worth clients.

Institutional Investor magazine notes that Sands added "concentrated" to his growth-stock description when he set out on his own, and he made good on that when he reduced his holdings from 75 to 30 or fewer. It quotes Sands as saying, "Once you get up into the high 20s, it's 'deworsification.'"

Frank Sands Jr. followed a similar path to his father's, starting with an MBA from the same university. After graduation he joined Fayez Sarofim & Co., a boutique money manager. At that firm he worked as a concentrated-growth manager.

Institutional Investor reports Sands Sr. began having trouble signing big pension funds and family offices because he had no succession plan. That was part of the impetus for hiring his son, Frank Jr., then 33 years old, in 2000. The son succeeded the father as chief investment officer and CEO in 2008.

Biographical information from Institutional Investor.

What is Sands Capital Management LLC?

This staff-owned, independent investment company operates four strategies/funds:

  • Select Growth (the original fund).
  • Global Growth.
  • Emerging Markets Growth.
  • Specialty Strategies.



The same approach is applied in all four strategies: "Sands Capital maintains a single growth-oriented philosophy that is applied across all strategies. Our philosophy is rooted in the belief that, over time, common stock prices will reflect the earnings power and growth of the underlying businesses."

According to its Form ADV filed on March 31, its biggest clients (based on assets under management) are pension and profit-sharing plans. Other significant clients include other investment companies, pooled investment vehicles, individuals, high net worth individuals, charitable organizations, corporations, government entities, insurance companies and foreign governments.

That same form shows total assets under management of $34,917,802,362, held on behalf of 497 clients (as of March 31).

Sands Capital has grown from $60 million in 1992 to $35 billion in 2017, indicating strong confidence on the part of its clients, and the clients no doubt have been influenced by the firm's ability to grow capital.

What is the Sandses' investment strategy?

Sands Capital offers this overview of its investment strategy on its web site:

"We apply a single growth-oriented investment philosophy, rooted in the belief that, over time, stock prices reflect the earnings growth of the underlying business. As growth investors, we believe the earnings power of an asset drives value. To create wealth for our clients, we must concentrate investments in a select number of what we think are high quality businesses that possess the ability to sustainably grow earnings over time. In our view, there are relatively few truly outstanding businesses that can sustain earnings growth while maintaining a leadership position over the long term. To identify these businesses we use a fundamental, bottom-up, business-focused research process that relies heavily on our six investment criteria as our compass."

That's a rather dense chunk of information, and it may be easier to understand the Sandses' thinking if unpacked somewhat:

  • Their starting point is a belief that stock prices reflect earnings growth over time.
  • Add to that a belief that value comes from the earnings power of an asset (stock/company).
  • The Sandses, father and son, apply a growth - and growth only - oriented focus in finding earnings power.
  • Delivering added value to clients comes from identifying businesses that can grow their earnings over time.
  • These businesses also must be able to sustainably grow their earnings.
  • They believe there are relatively few businesses that can both sustain earnings growth and hold on to leadership positions in their industries.



To find those businesses, they use a research process that is:

  • Fundamental.
  • Bottom up.
  • Business focused.



And, as noted in the quotation, they have six investment criteria (which will be listed in a following section).

The Sandses say they have a business-owner mindset and a long-term perspective. These claims suggest they don't see themselves as traders of stock but rather as users of stock markets to gain ownership positions in businesses that meet their criteria.

They also discuss the importance of conviction in investing, which reinforces the idea of owning a small portfolio of stocks to which they're deeply committed. That's borne out by a couple of stats from GuruFocus: the firm has just 54 stock positions, and its quarter-over-quarter turnover is 3%. They say, "We fundamentally believe that providing clients with a concentrated and conviction-weighted portfolio is a powerful way of adding value with prudence over full market cycles."

The tactics of Sands Capital

The company says, on its web site, "For over two decades we have focused exclusively on trying to identify leading growth businesses that meet our six investment criteria. These criteria form the foundation of everything we do at Sands Capital."

These are the six criteria; the firm does not describe the criteria in detail so the comments with them are, of necessity, speculative:

  1. "Sustainable above-average earnings growth" - presumably "above-average" means better than the average of the Standard & Poor's 500; and "sustainable" meaning better than the S&P 500 through the next several years.
  2. "Leadership position in a promising business space" - this suggests looking for companies that rank in the top two or three in sectors or subsectors that can be expected to grow in coming years.
  3. "Significant competitive advantages/unique business franchise" - does this company have a moat that will allow it to control its own pricing and margins?
  4. "Clear mission and value-added focus" - no conglomerates need apply - not only should companies know and exploit one clear competence, but they should also know how that special competence will generate returns for shareholders.
  5. "Financial strength" - presumably clean balance sheets, with little or no debt; strong returns on equity or assets and other quantitative measures.
  6. "Rational valuation relative to the market and business prospects" - suggests that the Sandses are looking for fair valuations rather than value propositions and definitely not stocks with unreasonable P/Es.



Sands Capital, as noted, is in the concentrated growth sector, and each of the criteria supports that strategy. With this many criteria, the universe of available stocks will be relatively small, restricted to companies that are intensely focused on what they're doing and where they are going.

Current holdings

A heavy weighting in technology highlights this sectoral profile from GuruFocus:

Sands Capital sectoral profile

This table shows the top 10 holdings of Sands Capital at the end of 2016 and the proportion of the total each represents:

Frank Sands top ten

Those stocks are:

  • Visa Inc. (NYSE:V)
  • Facebook Inc. (FB)
  • The Priceline Group Inc. (PCLN)
  • Amazon.com Inc. (AMZN)
  • Alibaba Group Holding Ltd. (BABA)
  • Alphabet Inc. (GOOGL)
  • Charles Schwab Corp. (SCHW)
  • Salesforce.com Inc. (CRM)
  • Baidu Inc. (BIDU)
  • Adobe Systems Inc. (ADBE)



First, note the heavy dependence on just four sectors, particularly technology; second, the Sandses have more than 11% of their holdings in shorts/derivatives; third, the concept of conviction has been discussed above and with that perspective note that the 10th-largest position accounts for more than 3% of the portfolio.

Performance

This GuruFocus table shows annual returns for the past decade and how they compare with the S&P 500 returns:

Frank Sands performance

Other cumulative results (from GuruFocus):

  • 15-year: 7.9% per year vs. 6.7% for S&P 500.
  • 20-year: 9.7% per year vs. 7.7% for S&P 500.
  • 25-year: 11% per year vs. 9.1% for S&P 500.



We've just discussed the heavy weighting in technology and three other sectors; they've given Sands Capital strong cumulative returns over 10 years but also dismal returns in some individual years.

Conclusion

The cumulative returns reinforce the idea that stocks should be held for the longer term. Buying and selling a position at Sands Capital for a year or two could be very good or very bad. These returns argue forcefully in favor of a long-term commitment.

A caveat: The heavy weighting in technology raises the question of whether an investor (if given the choice) should buy Sands Capital or buy a technology ETF plus an index ETF representing the S&P 500.

Of course, few of us will need to make a choice of that kind, but Sands funds can be expected to follow the highs and lows of the technology sector, or at least an important part of it.

All things considered, the Sandses are worth studying or emulating by any investor making choices for the far horizons. Their growth focus sets them apart from most of the other gurus seen at GuruFocus.

Disclosure: I do not own stock in any of the companies listed in this article, nor do I expect to buy any in the next 72 hours.

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This article first appeared on GuruFocus.