In an investor update, Bauman - the co-manager of the £2bn fund with Richie Freeman - said “the big scarcity right now” is growth as markets in the US push onto new record highs following five years of central bank intervention and improving investor sentiment.
“Trying to find growth in this environment - where global GDP growth is approximating 2 per cent - is really where there is a premium," the manager said.
“I believe those opportunities are becoming fewer and fewer in today’s environment. You either have overpriced, slow growth business models or you have overpriced growth companies that are trading in big data, information security or social media where valuations are almost back to bubble levels.”
Legg Mason ClearBridge US Aggressive Growth aims for “a different type of growth stock” to its peers,seeking out sustainable growers that can be owned for 20 or 30 years and grow in any environment.
Source: FE Analytics, as of 31 Aug 2014
Bauman highlighted Massachusetts-based biotechnology company Biogen Idec as an example of a stock where growth seems promising but valuations have not got ahead of themselves.
It’s the fund’s largest holding at 7.64 per cent and has been a feature of the firm’s US Aggressive Growth strategy since 1991.
“A company like Biogen Idec - which is the single biggest position in the fund and a name we’ve added to recently - trades at 20x earnings right now and is going to grow its revenue base almost 40 per cent this year,” he said.
“That’s our goal - to find business models where companies can grow through pricing power, innovation in new markets and where valuations are not yet stretched.”
The managers had a cash weighting of 11.78 per cent at the end of August, which is high when compared with its typical allocation of between 2 and 3 per cent. Cash has come down in recent weeks but remains elevated compared to history.
“That means we’re very comfortable with what we own. We haven’t really been raising money but we’ve had a significant amount of money come in over a relatively short period of time,” Bauman said.
“We have put a lot of money to work - over $1.5bn over this year alone. But we are holding a bit of cash in the expectation that the markets will remain volatile. We’re bullish on what we own but not as bullish on other areas that three and five years ago were at much more attractive valuations.”
Although volatility has picked up in 2014, the manager is surprised that the market has managed to come so far given its rapid rise in the previous year.
The S&P 500 gained 29.10 per cent in 2013 leading many to expect muted returns in 2014, but it has risen 9.03 per cent over the year to date.
However, he expects volatility to continue over the next few months and says stock-picking will be increasingly important over the coming six to 12 months as it becomes more difficult to find areas of remaining value in the US market.
“2013 was an easy money year. The S&P was up north of 30 per cent and this fund did quite well but I would say if your fund didn’t do well in 2013 there was something wrong. It was a year where virtually every sector rose and the market was a rising tide,” he explained.
“The US market and the developed world markets have surprised us this year on the upside. They’ve surprised with the resilience that they’ve shown after what was really four very strong years subsequent to the credit crisis lows that bottomed in March 2009.”
“[But] this year has been much more mixed and the S&P has pockets of strength and there have been significant pockets of detrimental returns. I believe for the next six to 12 months stock picking will return at a premium.”
FE Analytics shows the five FE Crown-rated Legg Mason ClearBridge US Aggressive Growth fund sits first quartile in the IMA North America sector over one, three and five years as well as shorter time frames.
It was also first quartile in 2010, 2012, 2013 and 2014 so far, although it slipped into the third quartile in 2011 with a loss of 2.64 per cent when the sector fell 2.28 per cent.
Fund vs sector and benchmark over 5yrs
Source: FE Analytics
Over five years the fund has returned 128.53 per cent, making it the best performer in the sector, compared with a peer group average of just 85.94 per cent.
As a point of comparison, its Russell 3000 benchmark rose 105.95 per cent over this time while the S&P 500 gained 97.90 per cent.
This impressive performance has come with higher volatility than than the peer group and the market.
Over the past seven years, Legg Mason ClearBridge US Aggressive Growth has annualised volatility of 21.56 per cent while the sector’s was 1.30 per cent and the S&P’s was 19.78 per cent.
In terms of positioning, the fund’s largest sector bet is towards healthcare, which accounts for 31.51 per cent of the portfolio and comes through holdings such as Biogen Idec, UnitedHealth Group and Actavis.
It is also has an overweight to the energy sector, owning names such as Anadarko Petroleum Corporation and Weatherford International.
It is underweight consumer staples, industrials, consumer discretionary and financials. Legg Mason ClearBridge US Aggressive Growth has ongoing charges of 1.78 per cent.
