Overview

Dean-Through Door_Candids-304 The Investment Policy Group (“IPG”), comprised of all portfolio managers and research analysts, is the catalyst in our decision-making process. Portfolio policy and stock selection are reviewed at IPG meetings held at least twice weekly. Specific decisions regarding purchases and sales, as well as the percent of the portfolio any security is to represent, are based on consensus resulting from these meetings and are implemented across all large cap growth accounts unless there are specific client restrictions. In fully discretionary accounts with no client restrictions, the portfolio managers have no discretion to enact trades that are not approved by the IPG. As the markets do not operate in a vacuum, the IPG also meets twice a month to discuss macroeconomic issues. In these meetings, the IPG makes short-term economic forecasts and systematically reviews long-term economic, social, political and demographic trends having important influences on the financial markets and the companies that we follow. Sector and industry group allocation may be confirmed by this top-down thinking.

Large Cap Growth

Montag & Caldwell’s growth equity philosophy emphasizes fundamental valuation techniques which focus on a company’s future earnings and dividend growth rates. The process is primarily bottom up and utilizes a present valuation model in which the current price of the stock is related to the risk adjusted present value of the company’s estimated future earnings stream. The Firm seeks to buy growth stocks selling at a discount to fair value and at a time when superior earnings per share growth is visible for the intermediate term.

Philosophy and Process

At Montag & Caldwell, we believe that good investment returns are derived from the competent, disciplined, fundamental analysis of individual securities, performed by experienced professionals operating as a team. We are long-term investors focusing on high quality growth opportunities. Our process is primarily bottom-up in which we inter-relate valuation with earnings momentum. We offer a concentrated portfolio of 30-40 issues actively managed by a team comprised of both portfolio managers and analysts. The team is the catalyst in our decision-making. While we recognize the need to diversify a portfolio’s securities and sectors in order to reduce its risk, we believe that, in order to add value, it is also important to have some sector concentration in the portfolio. We are willing to totally exclude a sector from our portfolios if we do not see sufficiently accelerating earnings and/or appropriate valuations. Our growth equity philosophy utilizes a valuation technique which focus’ on a company’s future earnings and dividend growth rates. The process utilizes a present valuation model in which the current price of the stock is related to the risk adjusted present value of the company’s estimated future earnings stream. Our analysts closely follow approximately 150 names culled from a universe of approximately 10,000 common equity securities through: market cap screens (>$3 billion); an expected 10% earnings growth rate, and a proprietary quality evaluation. We seek to buy growth stocks selling at a discount to fair value and at a time when superior earnings per share growth is visible for the intermediate term. Our employment of a risk-adjusted discount rate is a unique component of our valuation work. This rate is determined by our proprietary financial scoring process which rewards high quality companies. The resultant universe of approximately 500 common stocks is then subject to our proprietary earnings and valuation models. Analyst judgment based on qualitative factors and strong financial characteristics further narrow the universe to a select list of approximately 150 names. A holding will be reviewed for sale when it reaches our target price, which is normally 120% of the estimated fair value. A significant earnings disappointment will trigger an immediate review of the holding and a decision will be made to buy additional shares or reduce or eliminate the position.

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Sector Weights

March 31, 2017 Portfolio sector weights are of the Montag & Caldwell Large Cap Growth Representative Account.  Please see the disclosures presentation at the bottom of this page for important information that is pertinent to this chart.  Source: FactSet

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Separate Accounts

The Montag & Caldwell Large Cap Growth separately managed accounts were established in 1945 and the primary focus historically has been on the institutional separate account market, almost exclusively with our flagship large cap growth strategy.  We have focused principally on larger clients in the corporate, endowment, foundation, public and Taft-Hartley markets.  Our primary means of distribution has been through fee-based consultants or through our direct marketing efforts.  M&C is also a large cap growth manager in a number of manager-of-manager programs, serves as the sub-advisor for several mutual funds, including the AMG Managers Montag & Caldwell Growth and Balanced Mutual Funds, and also participates in various Wrap/SMA and UMA programs.

Mutual Fund

The AMG Managers Montag & Caldwell Growth Fund (“the Fund”) was launched on November 2, 1994. The Fund offers Montag & Caldwell’s philosophy and investment process to the general public. Primarily marketed through institutional networks, the AMG Managers Montag & Caldwell Growth Fund is utilized by investors as a way to access a daily valued product of our management services for accounts that are below our minimum individually managed account size of $10 million. The AMG Managers Montag & Caldwell Growth Fund offers investors the same large-cap, high quality growth investment process that has been applied to our individually managed accounts since 1972. The Fund is subject to the same decisions and portfolio investments delivered by Montag & Caldwell’s Investment Policy Group, which is chaired by Ron Canakaris.

AMG Managers Montag & Caldwell Growth Fund Link

Collective Investment Trust

The Montag & Caldwell Large Cap Growth Collective Investment Trust (“CIT”) was established in May 2009. The CIT provides a vehicle for qualified assets (ERISA) that do not meet the minimum asset level for a separate account, and for those unwilling or unable to invest in a mutual fund. The CIT is subject to the same decisions and portfolio investments delivered by Montag & Caldwell’s Investment Policy Group, as such the CIT offers investors the same large-cap high quality growth investment strategy that is available to our separately managed accounts. SEI Trust Company (the “Trustee”) serves as the Trustee of the Fund and maintains ultimate fiduciary authority over the management of, and the investments made, in the Fund. The Fund is part of a Collective Investment Trust (the “Trust”) operated by the Trustee. The Trustee is a trust company organized under the laws of the Commonwealth of Pennsylvania and wholly owned subsidiary of SEI Investments Company (SEI). The Montag & Caldwell Collective Investment Trust is a trust for the collective investment of assets or participating tax qualified pension and profit sharing plans and related trusts, and governmental plans as more fully described in the Declaration of Trust. As bank collective trusts, the Montag & Caldwell Collective Investment Trust is exempt from registration as an investment company. The Montag & Caldwell Collective Investment Trust is managed by SEI Trust Company, the trustee, based on the investment advice of Montag & Caldwell, LLC, the investment adviser to the Trust.

Commingled Fund

Montag & Caldwell introduced a Large Cap Growth Commingled Fund in December 2011.  This Fund allows for taxable clients as well as non-taxable, non-ERISA clients, and complements our existing Montag & Caldwell Large Cap Growth Collective Investment Trust Fund which serves qualified clients.

Performance

M&C’s high quality growth investment strategy enables its portfolios to participate fully in those market conditions that favor growth-oriented investment styles that are based upon earnings growth, not pure momentum regardless of valuation or earnings levels.  Typically, these are periods of low to moderate economic growth and low or declining interest rates.  In stable economic environments, the long-term consistent growth- rate of the Firm’s type of companies is in favor with most investors, and helps to drive the higher valuations of these companies relative to more cyclically oriented companies.  In low interest rate environments, investors are willing to pay more for high-quality and consistent earnings streams. One of the hallmarks of M&C’s large cap growth investment process is that it does not often stay out of favor for long periods.  The Firm’s attention to the valuations of the growth companies it buys allows it to find good opportunities even when the growth style of investing may be out of favor. Our investment process also tends to experience less downside risk relative to peer processes, and it would not be unusual for our product to outperform in a down market.  Our use of a stock-specific, risk-adjusted discount rate, which is a unique component of our valuation work, combined with our use of conservative growth assumptions in our quantitative valuation process have contributed to reducing risk in our portfolios while allowing us to maximize upside potential.  Our stock-specific, risk-adjusted discount rate is determined by our proprietary financial scoring process which rewards high quality companies, and also advantages companies with historically predictable earnings. The most difficult environment for M&C’s approach is one of speculative excess driven purely by price momentum and disconnected from fundamentals.

Quarterly Returns

Composite performance is annualized for periods greater than 1 year.  Returns as of March 31, 2017.  Source: Axys Please see the disclosures presentation at the bottom of this page for important information that is pertinent to this table.

 1Q17Year to Date1 Year3 Years5 Years7 Years10 Years15 Years20 Years25 Years30 Years
Institutional Equity (Large Cap Growth) Composite Gross of Fees6.786.785.997.3110.1210.218.246.267.609.5710.45
Institutional Equity (Large Cap Growth) Composite Net of Fees6.676.675.586.909.719.817.855.867.209.1710.05
Russell 1000 Growth8.918.9115.7711.2713.3213.679.137.217.318.739.18
S&P 5006.076.0717.1910.3813.3112.947.517.097.849.509.65

Monthly Returns

Composite performance is annualized for periods greater than 1 year.  Returns as of April 30, 2017.  Source: Axys Please see the disclosures presentation at the bottom of this page for important information that is pertinent to this table.

 4/30/2017Year to Date1 Year3 Years5 Years7 Years10 Years15 Years20 Years25 Years30 Years
Institutional Equity (Large Cap Growth) Composite Gross of Fees2.979.9510.718.1910.7110.688.206.857.33NANA
Institutional Equity (Large Cap Growth) Composite Net of Fees2.949.8110.297.7810.3010.277.816.456.93NANA
Russell 1000 Growth2.2911.4019.5112.1113.8713.868.887.997.08------
S&P 5001.037.1617.9410.4813.6812.857.157.617.58------

Calendar Year Returns

Understanding our style through relative performance is important, and is easily shown on a calendar year basis. As we discussed above, our clients do well in growth-oriented markets driven by earnings, rather than momentum regardless of valuation. Our clients also tend to do better in down markets, often as a result of a growth at any price environment coming to an end, resulting in volatility as the market re-prices risk commensurate with valuation. Please see the disclosures presentation at the bottom of this page for important information that is pertinent to this table. Source: Axys

 Percent Return Per Period   
YearGross of FeeNet of FeeRussell 1000 GrowthS&P 500
2016-1.26-1.657.0911.98
20156.846.445.681.41
20148.387.9713.0613.69
201328.9228.4633.4932.41
201213.8213.415.2615.99
20114.233.872.632.12
20109.479.0916.7215.05
200930.9430.4737.2126.45
2008-32.07-32.3-38.43-37
200722.2121.811.825.5
20069.028.599.0915.8
20056.285.855.274.9
20045.264.836.310.87
200318.3917.9329.7628.69
2002-22.5-22.82-27.89-22.11
2001-12.25-12.61-20.42-11.88
2000-8.07-8.44-22.42-9.1
199923.6823.2133.1621.05
199831.1530.6438.6928.49
199733.1432.6730.4833.25
199633.7333.3323.1222.96
199540.2239.937.1937.58
19940.22-0.112.641.32
199311.7311.352.910.08
19929.59.1157.62
199146.1545.6741.1630.47
19902.642.27-0.26-3.12
198926.5526.1235.9231.71
198814.7214.3211.2716.61
198713.0512.655.315.26
198615.8815.4715.3718.68
198525.9825.5532.8531.75
1984-1.63-1.98-0.966.27

Rolling 10 Year Returns

In our Institutional Equity (Large Cap Growth) Composite’s 30+ year history, we have accumulated 90 rolling ten year periods.  There have been only eight times when the ten year gross of fee return has under-performed the Russell 1000 Growth and only eighteen times has the net of fee Composite under-performed. Please see the disclosures presentation at the bottom of this page for important information that is pertinent to this illustration.  Returns as of March 31, 2017.  Source: Axys

Other Performance

While many investors have been too willing to embrace risk, we continue to err on the side of diligence and discipline – focusing on high quality growth companies with sustainable growth and return characteristics that are trading at reasonable valuations. We believe our approach is a prudent way to add value over the course of a full market cycle, which we have consistently done. This is a result of an active approach that may produce higher returns than the underlying benchmark over longer periods of time. To demonstrate the power of compounding relative out-performance, we have included an illustration. Those managers that can outperform their passive benchmark by even the smallest amount over longer periods of time can produce significant ending values over the alternative. Please see the disclosures presentation at the bottom of this page for important information that is pertinent to these illustrations. Returns as of March 31, 2017. Source: Axys; Growth of $20 million chart, the Institutional Equity (Large Cap Growth) Composite, net of fees, is compounded for 20 years.

Market Cycle Performance

Growth of $20 Million

Risk

Our use of a stock-specific, risk-adjusted discount rate, which is unique, and conservative growth assumptions in our quantitative valuation process have contributed to reducing risk in our portfolios while allowing us to maximize upside potential. Please see the disclosures presentation at the bottom of this page for important information that is pertinent to these illustrations.  
Data as of March 31, 2017.  Source: National Consulting Firm

Rolling Five Year Standard Deviation

 

Down Market Capture Chart

Portfolio Detail

As of March 31, 2017  Portfolio characteristics and top ten holding are of the Montag & Caldwell Large Cap Growth Representative Account.  Please see the disclosures presentation at the bottom of this page for important information that is pertinent to these tables.

Characteristics

Source: FactSet

Number of Holdings33
Weighted Average Market Cap$177,215MM
Price to Earnings -Trailing27.69
Price to Earnings (NTM)21.11
Estimated 3-5 Year EPS Growth14.18%
Active Share73.61%

Top Ten Holdings

Source: Axys References to specific portfolio securities are not intended as recommendations of those securities and carry no implications about past or future performance.  Information about all recommendations made within the past year is available upon request.

Alphabet Inc Cl A4.4
Visa Inc-Class A Shares4.3
Facebook Inc4.2
Apple Inc4.1
Kraft-Heinz Company4
Mondelez International4
UnitedHealth Group Inc4
Microsoft Corp4
Walgreens Boots Alliance Inc.4
Pepsico Inc3.8