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Loomis Sayles Growth Equity Investing: A Long-Term Approach to Alpha Generation

The Search for Alpha is the Search for Skill

We believe the pursuit of greater upside potential and managing absolute levels of risk are inextricable goals. Each tenet of our alpha thesis is designed – individually and collectively – to promote this dual objective for our investors.

We are long-term patient investors. We strategically allocate capital to select high-quality businesses with sustainable growth, only when they trade at a significant discount to our estimate of intrinsic value.

~ Aziz Hamzaogullari, CFA®
Founder, Chief Investment Officer, Portfolio Manager

Loomis Sayles Growth Equity Team is an active manager with a long-term, private equity approach to investing. Through their proprietary bottom-up research framework, they look to invest in those few high-quality businesses with sustainable competitive advantages and profitable growth when they trade at a significant discount to intrinsic value.

Approach & Process

Loomis Sayles Growth Equity Team’s seven-step research framework is the cornerstone of its investment decision-making process and drives security selection. The research framework represents long-standing insights about investing and is structured around three key criteria: Quality, Growth, and Valuation. Through the disciplined and thorough implementation of bottom-up fundamental analysis, the team seeks to understand the drivers, opportunities and limits of each business. Many Environmental, Social, and Governance (ESG) considerations are embedded in this process, as well.

Seven-Step Research Framework

Sustainable Competitive Advantage: Quality

Identify unique elements of a company’s business model (e.g., network effect, low cost advantage, strong brand awareness and high switching costs). Can this company defend and sustain its competitive advantage over the long term?

Competitive Analysis: Quality

Assess barriers to entry, industry rivalry, power of buyers versus suppliers, and substitution threats. Evaluate the entire value chain and profit pool to discern the structural winners in the long term.

Financial Analysis: Quality

Assess balance sheet health (low or no debt is ideal), capital intensity, business mix and margin structure. Require sustainable free cash flow growth, an ability to meet reinvestment needs, and cash flow return on investment above the cost of capital.

Management: Quality

Partner with management teams who share our long-term perspective, manage the business with vision and integrity, and whose incentive is aligned with long-term shareholder interests. Evaluate management’s ability to allocate capital to investments creating long-term value.

Growth Drivers: Growth

Evaluate sources and sustainability of profitable growth. Focus on long-term secular and structural growth drivers – dynamics that aren’t likely to change in five years or more. Forecast the growth rate independently of company guidance or Street expectations.

Intrinsic Value Range: Valuation

A company’s value depends on its long-term ability to generate profitable free cash flow growth. The present value of future free cash flows is our core methodology for estimating intrinsic value. Conduct sensitivity analysis of key variables to assess downside risk and focus on high-impact drivers of value. Best-, base-, bear- and worst-case valuation scenarios guide the timing of buy/sell decisions and help guard against decision-making pitfalls.

Expectations Analysis: Valuation

Assess the valuation assumptions implied by the current stock price to differentiate fundamental drivers of value from market sentiment drivers of price. Understand where and how our perspective diverges from that of the market.

Funds

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Loomis, Sayles & Company helps meet the needs of institutional and mutual fund clients worldwide with performance-driven investment teams backed by deep proprietary research and a system of integrated risk analysis.

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All investing involves risk, including the risk of loss.

The provision of this material and/or reference to specific securities, sectors, or markets within this material does not constitute investment advice, or a recommendation or an offer to buy or to sell any security, or an offer of any regulated financial activity. Investors should consider the investment objectives, risks and expenses of any investment carefully before investing. The analyses, opinions, and the investment themes and processes referenced herein represent the views of the portfolio manager(s) as of February 2021 and are subject to change. There can be no assurance that developments will transpire as may be forecasted in this material. Past performance information presented is not indicative of future performance.

This material should not be considered a solicitation to buy or an offer to sell any product or service to any person in any jurisdiction where such activity would be unlawful.

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