The ability to build conviction at the right time has rewarded Felise Agranoff, a member of Citywire’s equities elite. But so has knowing when it is time to cut stocks loose. As the JP Morgan manager puts it: ‘We like to say we exhibit strong sell-discipline.’

JP Morgan contributes more managers (and more AUM) to our equities elite list of 421 names than any other house: 18 managers run a combined $93bn across 28 funds.

New York-based Agranoff, one of four female JPM managers on our list, joined the firm 18 years ago as an analyst covering sectors such as energy, industrials and business services. She now runs four funds totalling $32bn.

Her first management gig came seven years ago as co-manager of JPMorgan Mid Cap Growth. The Small Cap Growth and Growth Advantage funds later followed.

Alas, these are not the best times for growth and Agranoff’s impressive 17-month streak as a Citywire AAA-rated manager is now over. That was the first topic of discussion in this interview.

Citywire Amplify: How supportive was the environment for your investment approach in the period you held a Citywire AAA rating until April 2021?

Felise Agranoff: Despite being growth managers, we have deep domain expertise and a team of research analysts in every sector. We’re open to finding opportunities in any sector where we can gain the most differentiated perspective and find the most attractive risk/reward.

We went from having high exposure to areas such as technology, when they had been underappreciated years back, to being quite underweight on technology in our Mid Cap Growth and Growth Advantage strategies.

Instead, we’ve been finding opportunities elsewhere and being open-minded. We’ve found areas such as healthcare where we’ve been more overweight recently. We’ve also found some of the more steady-Eddie growers in healthcare and more stable growth companies.

[See Agranoff’s stock picks at the bottom of the page]

We had also been finding opportunities in areas like financials, and have interesting exposures to energy. At the same time, our benchmarks have become increasingly growthy in recent years.

We’ve done a good job of focusing on those high-quality growth companies that we believe have sustainable competitive advantages and underappreciated growth, and have avoided many of the blown-up names that are in our benchmarks, such as Peloton. Palantir, Pinterest and Carvana are not big benchmark names, but they are nice contributors to performance in this period of volatility.

Citywire Amplify: What’s your approach to risk in the areas where you had no previous exposure?

Felise Agranoff: We pride ourselves on a keen focus on risk management. We think a lot about bet sizes and portfolio construction. Our largest position sizes in our portfolios tend to be our highest-quality companies that have good valuation support and downside protection. But for companies that may be more volatile, we tend to take on smaller bet sizes. That helps the consistency of our performance over time.

In periods like we’re in now where there is a bit of a transition, we were early in reducing exposure to many of the highest-growth areas of our universe, such as technology – software in particular – where valuations got to extreme levels.

Citywire Amplify: What are some of the criteria for the initial consideration of a stock? 

Felise Agranoff: Our investment process is extremely bottom-up. We look for high-quality companies. That means strong positions in industries with high barriers to entry, and high-quality management teams that focus on value creation. We also like companies that have a high degree of recurring revenue in a more predictable nature.

We’re looking for large, underappreciated market opportunities where we can get a different perspective.

Citywire Amplify: How is that differentiation achieved? 

Felise Agranoff: Our fundamental belief is the market often underappreciates both the magnitude and the duration of a company’s growth opportunity and so we carry out deep fundamental work. We have great access to management teams, but we don’t just meet with CEOs. After we hear what the management’s vision is, we go in and do our own proprietary research where we like to speak with industry contacts, customers, competitors and suppliers. We read technical papers. We do surveys.

The market often underappreciates both the magnitude and the duration of a company’s growth opportunity

We have a dedicated team of research analysts that has deep domain expertise in every sector, and digs in for a differentiated perspective, versus what management teams are telling us. Then we incorporate all of that qualitative research into a financial model and figure out, from a risk-reward standpoint, where we think that that differentiated perspective is underappreciated by the market.

While we’ve been quite underweight high-growth and tech for a while, we are starting to find some more interesting opportunities in that area amid the volatility on the margin.

Citywire Amplify: There are fund managers who like to claim they are not interested in stories. But what is your approach to fundamentals?

Felise Agranoff: There has never been more disruption. As growth investors, we try to figure out where the disruption is real, and where there are going to be large paradigm shifts or large areas of secular growth. While some of these things can get hyped, often people underestimate both the magnitude and duration of the impact.

It’s important to get the timing right. You can think about trends that may be interesting from a growth perspective over the next 10 years. But from a stock perspective, you want to get involved when growth is about to inflect and the company is as close to generating as strong free cashflow as possible.

We were investors in Tesla. The early days were speculative, and we have a keen eye on risk management, so we did have a modest bet size for a long time. But we believed people underappreciated both the magnitude and the duration of the growth opportunity as the vehicle fleet becomes electrified, and that Tesla had a strong competitive position.

It’s important to get the timing right. You can think about trends that may be interesting from a growth perspective over the next 10 years. But from a stock perspective, you want to get involved when growth is about to inflect

It wasn’t until we saw the cashflow characteristics inflect that we got more excited. What was a story then became a real high-quality business.

We initiate a name with a smaller bet size, and as we get confirmatory evidence for a thesis, we then build up our bet sizes over time, and that’s how it works. For every new name that we initiate, we make sure that we have our investment thesis on paper as well as what we call a pre-mortem: predetermined risks we need to monitor.

To the extent we see contradictions to our investment thesis, we’re quick to trim or move on from a company. We like to say we exhibit strong sell-discipline. That’s a hallmark of our strategy. In growth land, it’s as much about avoiding the losers as it is picking the winners.

Citywire Amplify: What are some of the investments you’ve written off from your portfolio?

Felise Agranoff: One is Affirm, in the buy-now-pay-later space. That was an area where we were excited about the long-term penetration opportunity, but we realised that the space was more competitive than we initially appreciated. Competitive advantages are core to our investment philosophy.

DraftKings had a large market opportunity in the online sports betting space. But we got less conviction in the long-term profit model. These were really small bet sizes.

Citywire Amplify: With inflation, how are companies protecting recurring revenues? 

Felise Agranoff: Naturally, when you have a strong competitive position, you have stronger pricing power throughout cycles. We also do try to focus on companies where their products are a small percentage of the overall cost of something. Zoom is not an expensive product, despite it being a crucial software relative to the value it creates.

Citywire Amplify: Some companies in the vaccine sector, such as Moderna, have seen massive growth during the pandemic. How have companies been affected now times have changed?

Felise Agranoff: We have a deep tenure healthcare research analyst team. They felt vaccines were going to go into oversupply, and we’ve been careful about our exposures to those companies, even though they had strong earning divisions and price momentums.

In many cases, the vaccines and Covid made these companies better companies than they were historically, and they were able to leverage the cashflow well and do great acquisitions that add to the longer-term growth profile.

Book recommendations

Reminiscences of a Stock Operator by Edwin Lefèvre: ‘It teaches you to be mindful of what the market is telling you. I think that that’s been important to our success.’

Built to Last: Successful Habits of Visionary Companies by James Collins and Jerry Porras: ‘It focuses on high-quality companies that have sustainable modes over a longer period.’

One Up on Wall Street by John Rothchild and Peter Lynch: ‘It’s focused on getting a differentiated perspective.’

Elite manager, elite stocks

Energy

EOG Resources: ‘An exploration and production company. It has a high-quality asset base, plus a best-in-class management team in a space in which it’s been difficult to create value over time. It has been focused on organic investments and differentiated itself by generating strong returns throughout the cycles while also minimising their environmental footprint.’

Quanta Services: ‘A leader in building transmission and distribution infrastructure. As renewables become a bigger percentage of the grid, we need increased investment in transmission and distribution. We think people underestimate the magnitude and the duration of this growth opportunity.’

SolarEdge: ‘A leader in solar inverters, which are the brains behind the operation. When you’re putting solar on a rooftop and adding storage as well, this company’s products integrate it all.’

Healthcare

Centene: ‘Centene is a high-quality health maintenance organisation in the Medicare space that has a nice margin improvement, driven by a management turnaround.’

McKesson: ‘A leading drug distributor and a higher-quality business than the market appreciates.’

Horizon Pharma: ‘A biopharma company that focuses on relatively rare diseases such as thyroid eye disease and gout. Strong free cashflow generation, fantastic commercial execution and has created value through business development and R&D.’

Hologic: ‘Diagnostic company that did some of the Covid tests.’

Catalent: ‘Outsourced biopharma manufacturer that manufactured some of the vaccines.’

Industrials

Ametek, Trane and Ingersoll Rand: ‘Strong management teams and strong pricing power as well as sustainable demand in periods of volatility.’

Tech

Palo Alto Networks: ‘A leader in cybersecurity software’.

Zoom: ‘We believe it has an underappreciated growth. It’s a higher-quality company than it was heading into the pandemic with a stronger competitive advantage. It’s well positioned to leverage the network and move into new areas such as Zoom Phone.’ 

Bumble: Online dating.

Globant: IT services.