A sub-fund of Legg Mason Global Funds plc, co-managers Richie Freeman and Evan Bauman (pictured) run the fund with the expertise that only a combined 50 years in the industry can provide. FE only has data for the fund going back to May 2002; since then the duo has
returned 244.62 per cent, easily outpacing its Russell 3000 Growth benchmark and IA North America sector average. It’s also well ahead of the S&P 500.The fund has beaten its peers in seven of the last 10 calendar years, and is powering ahead so far this year as well.
So, what’s the catch? Why hasn’t everybody thrown their money at the $4.6b fund? Quite simply, they have a lot of investment principles that are difficult for many people to swallow.
“We look at ourselves as business owners, and we’re never going to make a buy/sell/hold decision based on either the Russell or the S&P’s position,” said Bauman. “We are maybe more benchmark-aware because of the world we live in, but we never make investment decisions based on how the benchmark is positioned.”
As many US fund managers keep a close eye on what to purchase following Wednesday’s Federal Open Market Committee (FOMC) meeting, Bauman and Freeman are instead focusing their attention on the stocks they already own.
Performance of fund versus sector and indices since May 2002
Source: FE Analytics
Bauman said: “We’re probably the lowest-turnover product that you’re going to find in the growth universe in the United States. We have the smaller positions we’re incubating, but the bigger, more established and profitable companies that we own at the top of the portfolio are all long-standing investments of over 19 years on average.”
Since the strategy was launched, the annualised turnover has remained at approximately 5 per cent per year, which points to a very long holding period on average.
“Our strategy hasn’t really changed in the 31 years we’ve been managing the money,” Bauman added. “The market has changed, but the strategy itself has been incredibly consistent.”
Another factor which sets ClearBridge US Aggressive Growth apart from the crowd is its high level of conviction in the stocks that it owns.
While the fund aims to invest in between 50 and 70 holdings at any one time, its top-10 stocks account for half of the entire portfolio. What’s more, these 10 companies have been in the fund for nearly 20 years on average.
Bauman said: “This should be an approach where you can assume high active share, which we have at more than 90 per cent, and also assume some pretty sizeable overweights in certain sectors. Many of those are structural, and in fact, we’ve had some pretty structural underweights as well.”
The sector they are most overweight in is healthcare and biotech, which accounts for 34.18 per cent of the fund.
“We don’t believe the biotech space in the US has ever been as strong as it is today,” Bauman said. “We’ve had exposure to US biotech companies since the fund’s launch in the US in 1983. We owned Genentech 45.5 per cent as the very first purchase ever made in the fund in the US, so it’s remained a core overweight for us, throughout the entirety of the fund’s life.”
A sizeable 9.22 per cent of the fund is also allocated to Biogen Idec, which is only the 1,072th most popular stock in the entire IA North America sector.
“As we sit here today and global growth is well below capacity, we’re finding some of the best growth opportunities in these US biotech companies,” Bauman continued.
“Both profitable, larger-cap companies which comprise our top-10, including Biogen Idec, Actavis, Vertex pharmaceuticals, and other companies which have more of a small and mid-cap bias, and this has been an area where we’ve found opportunity for growth and we’ve seen significant consolidation.”
Clearbridge Aggressive Growth’s second-biggest overweight is in energy, to which they’ve allocated 13.47 per cent of the fund.
“On an absolute basis it’s the third biggest weighting,” Bauman explained. “That said, it’s not a prediction on the price of commodities. What we saw last year was that macro-predictions are often wrong. I don’t think many people predicted the pullback in the price of oil, and fewer maybe still predicted the pullback in interest rates that we saw in 2014 in the US.”
What Bauman and Freeman look for as bottom-up stock-pickers is a potential upside in stock price, valuation support and companies which can generate significant amounts of cash regardless of the economic backdrop
“In the case of the energy companies that we own, we look for companies that can live within their cash-flows and can generate free cash-flow in a period of stress, and we’ve found that with a number of our asset plays from Anadarko Petroleum to a new field exploration,” he said.
“We have long-term exposure to these businesses, which we’ve had on average for over five years, but we’ve been very tactical in deploying new capital into that.”
In fact, as their level of conviction in their assets is increasing, they’ve dropped their cash weighting significantly.
In October, the fund sold off by 10 per cent, but they used this as an opportunity to put more cash to work across their product base, bringing the weighting down from 16 per cent to 7 per cent.
“Even into recent months we’ve continued to take the cash level across our product down,” Bauman said. “It’s now a little less than half what it was back in the June/July period of last year, and that’s been in the face of continued strong subscriptions into our product.”
“We’ve gotten more energetic and more highly-convicted in some of our energy names, based on the fact that valuations in some of the companies we own, both asset plays as well as some of the drilling companies, have dropped to levels never seen before - the cheapest valuation levels in history in some energy companies and some more commodity-related names.”
“So we’ve taken cash down from about 16 per cent, which was the highest it’s ever been, to about 7 per cent where it is today.”
Their conviction has paid off; since October the fund has returned more than 25 per cent, which compares to just over 23 per cent from the IA North America sector average.
Performance of fund, sector and indices over 3yrs
Source: FE Analytics
The duo’s confidence is placed on the innovation and growth potential of the products they are buying as opposed to how ‘cheap’ they are.
“I think this is an environment where, to sum up, stock selection is at a premium, the sectors you own are at a premium, the stock market is up three-fold from 2009; the US market is no longer cheap,” Bauman said.
“This is a period where it’s more important to own the right companies, the right businesses and the right sectors, rather than just owning the market as a whole.”
“I’m probably more bullish on what I own than the overall market, and the cash level and fund [performance] really speaks for itself.”
ClearBridge US Aggressive Growth has clean ongoing charges of 1.13 per cent and is available across a number of platforms.