Taking a long-term view often means holding companies that will go through some downturns but being prepared to holdout on that risk, according to T. Rowe Price’s Taymour Tamaddon. 
Tamaddon, portfolio manager of the T. Rowe Price US Large Cap Growth Equity fund, believes that “active investment managers must be comfortable being uncomfortable.”
To deal with these sometimes “uncomfortable” holding periods, he explained that a fund manager needs to fundamentally understand what they are trying to achieve with their investment and stay true to their philosophy.
“In our case,” he said, “no matter what the prevailing backdrop is, we try to build a portfolio of ‘all-season’ growth companies that we are confident can do well in most economic and market environments.”
But when stocks do start to struggle – either because of a deteriorating market backdrop or a material challenge to an individual company – Tamaddon explained that his process demands he keeps in mind his understanding of how the business really makes its money to determine its true value.
“For us, our conviction is defined by this view of true company value, not the stock price,” he said. “If we do our homework, we can be prepared to overlook – or take advantage of – an indiscriminate sell-off for the broad market or an individual stock.”
To explain this Tamaddon gives examples of three times when he has been “uncomfortable” holding certain stocks recently.
The first is social media giant Facebook, one of the iconic US tech FAANG stocks (Facebook, Amazon, Apple, Netflix and Google-parent Alphabet) which have dominated the S&P 500.
Indeed, the US technology sector is the biggest exposure of Tamaddon’s $2.2bn T. Rowe Price US Large Cap Growth Equity fund with three out of the five FAANGs in its top ten – Amazon (7.89 per cent), Alphabet (5.91 per cent) and Facebook (5.87 per cent).
Whilst Facebook has been a topic of much debate over the years, the recent aftermath of the Cambridge Analytica data scandal saw its stock market value plummet more than $100bn.
The watershed moment of the Cambridge Analytica exposure and the subsequent privacy concerns made it a tough time to hold Facebook, according to Tamaddon.
Facebook’s share price over the 5yrs
Source: Google Finance
“However, we believe the company is actively tackling its issues head on, particularly in relation to third-party data. As for regulation of tech groups, it is not certain at all right now what rules the authorities are trying to implement,” the manager said.
“What is commonly overlooked is the fact Facebook continues to attract users to its platform, with about 400 million people joining since the concerns about privacy were first raised. More advertisers have also been added to the platform over this period.”
Aside from continuing to bring in users and advertisers, Tamaddon added that the company is adding to value to itself as it works to further monetise its activities.
“We increased its position in our US Large Cap Growth Equity strategy after we noted an increase in the response to advertising – particularly on its growing ‘stories’ feature,” he pointed out.
Tencent
The next stock example is Chinese multinational holding company Tencent Holdings, which run numerous internet-related services such as entertainment, AI and technology.
Tamaddon explained how T. Rowe Price has held the company for over a decade, with portfolio managers investing in it from when it was just a $3bn market-cap company through to about $440bn today
“More broadly, we have been investors in dominant global tech platforms for many years, so we have tremendous experience of how these types of business models work,” he added.
But whilst Tamaddon notes that the Tencent continues to experience significant growth, it has a monetisation rate of just 30 per cent compared to similar platforms in the US.
Although he does not expect the firm to improve this to parity in the short term, a move from its current 30 per cent to a monetisation rate of just 50 per cent would be “incredibly powerful”.
Tencent’s share price over the past 5yrs
Source: Google Finance
But holding the stock has been uncomfortable at times, as it has been caught up in market concerns about slowing Chinese economic growth and its share price has suffered as a result.
“Sentiment is obviously significant when it comes to the Tencent, as we saw when the stock dived 40 per cent from March to September last year on fears surrounding Chinese growth,” the manager said.
“At the time, our analyst out in Hong Kong placed a 4 per cent probability of downside and 96 per cent probability of upside on a three-year view.
“Therefore, it shows that if you do have strong conviction in a business model and a true understanding of its potential, you can take advantage of uncomfortable dislocations.”
Boeing
The final holding is aerospace company Boeing, a stock Tamaddon admits is “clearly a highly controversial company to discuss” due to the crash of two 737 MAX aircrafts. This resulted in the deaths of hundreds of people and causing all MAX flights to remain grounded.
Boeing’s share price over the past 5yrs
Source: Google Finance
“While the recent events were terribly saddening, as a long-term investor in the company it is important to re-examine the rationale for initially buying the stock, while also look forward,” Tamaddon said.
“Firstly, holding what is perceived as a highly cyclical company in a growth portfolio is unusual. However, Boeing is one half of what is effectively a global duopoly and it is a less cyclical business than the market believes.
“Air passenger trends are favourable globally, while we believe that Boeing’s 787 aircraft, with its composite fuselage, is the most innovative and fuel-efficient product available. As such, the 787 is attracting strong demand and generating significant free cash flow.”
Tamaddon is the manager of five Crown-rated T. Rowe Price US Large Cap Growth Equity fund.
The $2.2bn fund mainly invests in large-cap companies within the US, companies which he believes “have the potential for above-average and sustainable rates of earnings growth”.
Fund versus sector over the past 5yrs
Source: FE Analytics
The fund made 149.30 per cent returns over the past five years, outperforming the IA North America sector; which made 92.23 per cent over the same time frame.
It has an ongoing charges figure (OCF) of 0.82 per cent.