Thread by @NeckarValue

This is Henry Ellenbogen who managed the massive T. Rowe Price New Horizons Fund.

E. picked growth and compounder stocks, expanded into venture, beat the market, then left to found Durable Capital.

Here's what I learned from his letters about his playbook for "durable growth":

"Investing in small-cap growth stocks is an immensely creative process, where creativity and success are defined by the ability to see what others—most market participants—don’t see."

Ellenbogen moved fast: at 19 years a brief stint as Chief of Staff to Rep. Peter Deutsch (he was called "boy wonder of Capitol Hill"). Harvard JD/MBA, then joined T Rowe in 2001 to cover media and internet.

PM of Media and Telecom Fund 2004-09. New Horizons fund 2010-19.

Ellenbogen watched the bursting of the dotcom bubble but had no scar tissue. The market turned very skeptical of internet companies but E could see that despite “obvious misallocation of capital” investments in capacity during the boom were about to fuel a revolution.

At the media and telco fund he invested in companies like $GOOG $AMZN $TCEHY

"Once it builds a market-leading service, the company must relentlessly utilize its scale advantages to improve and innovate at a faster rate than its competition."

In 2010, he was made PM for the New Horizons Fund.

Since 1961, the fund had invested in “emerging growth” ("small-cap companies that have the potential to be much larger over time") companies like Xerox, Texas Instruments, Wal-Mart, Starbucks, Paychex, Medco.

Ellenbogen learned from Jack Laporte, the fund's PM for 23 years.

"If our industry had a hall of fame he would be in it, but even that would understate his impact.”

Laporte stressed holding on to winners. He had sold Starbucks and Walmart too early.

“Our overall goal is to own companies that are innovative early-stage or durable growers with the potential to become much larger, successful firms over time. These stocks have the potential to generate solid long-term returns for our shareholders.”

Ellenbogen built his portfolio out of 1/3 "early-stage growth" and 2/3 into "durable growth” companies (aka “compounders” which “leverage valuable competitive moats to gain market share and compound capital methodically over time”).

“We spend significant effort examining the entire ecosystem of industries that can produce value over time. We seek out entrepreneurs, venture capitalists, and innovators to learn about the trends in their industries and search for unique companies that can define their markets."

This meant eliminating what he called the “false dichotomy” of public vs. private market investing. He wanted his team to look for great companies and patterns in both markets. He added a private investments pocket to his mutual fund that grew to 5% of the portfolio.

“We view our private investing as an extension of our early-stage growth investing discipline and not as a distinct practice.”

"It sounds so simple, but it’s very hard to operate."

Ellenbogen’s mission is to find the rare companies that can compound for the long-term. This means he's willing to invest in a venture round and "average up" after the company is public.

“We do not invest in private companies to guide them to an IPO or do from private-public arbitrage. We want to serve as a stable partner that encourages businesses to compound wealth in the long run through durability and sustainability.”

Stats on 10 year compounders (20% CAGR):

Looking for second acts.

“We seek companies that have the potential for an Act 2. These enterprises have the ability to find a second phase of growth—a new product, additional market, or innovation—after their first growth engine, or Act 1, has run its course."

"Transitioning requires a number of skills ... managers need the ability to adapt and transition.

Vital to doing this successfully is a commitment to intellectual honesty, diversity of thought, and emphasis on organizational adaptability.”

Vail Resorts $MTN was one example of an Act 2.

“When we first bought the stock in 2010, Vail was considered a real estate company. But we saw a company in transition, moving from a transactional toward a subscription business with high returns on capital and a network effect”

This is a people business.

"From the start, we always placed a premium on the chief executive and management team of private enterprises. In early-stage companies, leadership has an exponential impact on business success."

Ellenbogen emphasized leadership for two reasons: it's a key factor at early growth companies and in Act 1 to Act 2 transitions.

And he needed to build trust and deep relationships with entrepreneurs if he was to gain access to the competitive world of venture capital.

"How do we get access to these companies? It's because of the consistency of how we handle ourselves in tough times."

"How do you act, what is your demeanor, what are your incentives and what is your alignment on people's toughest days?"

One example was $NFLX

“We alongside TCV recapitalized it after the Qwikster thing."

"We were impressed with the Netflix management team... the one thing that you knew about Reid is that the guy was intellectually honest. He realized his mistakes."

Ellenbogen likes "leaders who are data-driven and have a rational system of managing according to key performance indicators (KPIs)"

“When we invest in a private company, we ask management to create one-page monthly KPIs"

He applies the same philosophy to his portfolio and slices and dices performance different ways.

For example, he does cohort/vintage analysis ("like a sports team evaluating its draft classes") of his top public and private investments:

These were the fund's top 20 contributors as of December 2018 over the preceding five-year period.

He also looked at “private compounders” (equivalent of 20% over 10 years).

“If you're a fundamental investor you have to understand what the skillset of a human is and what the skillset of a machine is, and you have to continue to become greater at where humans are relatively advantaged."

I wrote him up on my substack:
neckar.substack.com/p/henry-ellenb…