After the heavy losses sustained in the market crash of 2008, many investors are understandably wary of volatility, erring on the side of caution in order to preserve capital. However Bauman, co-manager of the $206.2m Legg Mason ClearBridge US Aggressive Growth portfolio, says volatility is vital for the success of growth-oriented funds.
"I think volatility is a great thing for this strategy because it gives you an opportunity to buy," he explained. "But you have to have a long-term view."
"I don’t think I would manage if there was no volatility. I love volatility. It makes you crazy when we have to explain why we [underperformed] in the third quarter of this year, but we’ve made it back since."
The manager favours small to mid cap companies because they have greater potential for growth.
However, he says the size of a company does not necessarily dictate whether it has the kind of growth potential required to be included in his concentrated 55-stock portfolio.
"A growth stock is one that goes up," he commented.
The staunchly contrarian manager admits he made the wrong call by not buying Apple.
"Apple still kills me," Bauman added. "I look at it every day and kick myself a little bit."
However, the manager is still able to gain access to Apple’s growth qualities through companies that service the technology giant.
He adds that the company is also in a very competitive sector, which could constrain the growth of the "over-owned and over-loved" firm.
He tips stocks such as flash memory card manufacturer SanDisk, which provides Apple with memory storage for the iPhone.
While he recognises that there is a risk of smaller companies falling prey to changing whims by Apple’s design and technology decision-makers, he says he mitigates this threat by choosing companies that sell across the market and have "strong patent estates".
The four crown-rated Legg Mason ClearBridge US Aggressive Growth portfolio is a top-quartile performer over one, three, five and 10 years. It has delivered 78.82 per cent over the longer period, while the IMA North America sector has made just 55.84 per cent.
However, the fund has underperformed the Russell 3000 Growth index, which returned 81.93 per cent over the period.
Performance of fund vs sector and benchmark over 10-yrs
Source: FE Analytics
In spite of the fund’s outperformance, it has been less stable than the majority of funds in the sector over 10 years. It has a bottom-quartile annualised volatility figure of 20.39 per cent.
The fund is fifth-highest in the sector in terms of Alpha – or value added to the benchmark – over 10 years, at 2.28.
It has also achieved a top-quartile Sharpe ratio of 0.12 over the period.
The fund is overweight healthcare and consumer products, with more than 50 per cent of its assets invested in the two sectors.
Among its top holdings are Biogen, a US biotech company specialising in drugs for neurological disorders, and cable and internet provider Comcast.
The Dublin-domiciled vehicle has a minimum investment of $1,000 and a total expense ratio (TER) of 1.80 per cent.
As a manager, Bauman has nearly doubled the returns of his peer group over three and five years, delivering 42.1 per cent to his investors over the longer period, compared with 25.64 per cent from his rivals.