Launched in May 2008, the £29.03m Legg Mason Global Equity Income fund is at the smaller end of the spectrum, but its performance has been strong – outperforming its IMA sector peers across one-, three- and five-year time periods.
Manager Paul Ehrlichman, who heads up ClearBridge Investments’ global equity income team, notes the objective of the fund is to achieve a diversified level of income – both in the form of dividends and dividend growth, and capital appreciation.
He says the team “looks to invest in high-quality companies misunderstood by the broader market”. The team, which saw the addition of Joseph Mack and Michael Kypreos as a research analyst and research associate in April 2014, adopts a disciplined contrarian style, with a systematic, bottom-up approach to stockpicking to find undervalued companies.
Mr Ehrlichman notes the investment approach focuses on “strong management teams and companies that are highly competitive in their field, with potential for strong future growth.” The manager and his team use both quantitative tools and fundamental analysis to assemble a portfolio of roughly 50 to 90 stocks.
Although the investment process has not changed, it has been enhanced over time. Mr Ehrlichman says a new factor that has been identified as an effective addition to valuation screens is the measure of gross profits to assets, on both an absolute and sector relative basis.
“Our ‘quant’ folks on the investment team are always searching for tools that make sense from a fundamental standpoint and have the potential to aid an active team of stockpickers. Finding firms with the highest amount of value added – as evidenced by the difference between what they charge their customers and basic costs – along with a solid return on assets makes a lot of sense to us. We plan to integrate this sub-screen into our existing quality and growth screens and monitor the effectiveness of this additional measure.”
The manager adds that while the macro environment is important to understand, it is not a primary driver for stock selection. The fund’s Kiid risk-reward indicator places it towards the higher end of the spectrum at a level five, while the ongoing charges are 1.77 per cent.
“Market concerns, poor economic growth, the bond rally reversing, a China slowdown, and so on, have all created opportunities for a value investor like us, and we believe much of this uncertainty and pessimism has been priced into the market,” explains Mr Ehrlichman.
“Given our bottom-up orientation, we do not try to predict the future but instead assess and evaluate macroeconomic observations and incorporate this into our view for how these external influences might impact or influence the individual companies under consideration.”
For the five years to July 18 2014 the fund has delivered a return of 84.8 per cent, compared with the IMA Global Equity Income sector average of 82.41 per cent. Its short-term performance is equally impressive, with its return of 10.89 per cent for the 12 months more than double the 4.5 per cent sector average.
The manager notes that in the past 18 months the team has built up a “significant overweight to Europe” at approximately 43 per cent, compared with 18 per cent for the index – combined with an underweight position to the US.
He adds: “Within Europe we’ve been de-risking the portfolio – increasing our exposure to large caps in addition to rotating into firms with more of a domestic focus. We still see opportunities within the mid and small-cap space in Europe as these companies continue to expand, given their ability to raise capital independently without the need to be tied to the bank, but we believe a barbell approach (large and smaller ends of the market cap size) makes more sense.”
In terms of sector weighting, the team has increased consumer staples exposure, while the manager says “energy promises to be a positive area for dividend growth, as firms in this sector have been cutting capital expenditure and freeing up cash-flow. We’ve moved from a significant underweight the energy sector to a near-benchmark position.”
Expert view
Jake Moeller, head of Lipper Research:
This portfolio has the highest geographical diversity of the three funds with its portfolio. It is underweight the US and holds a benchmark position in the UK, and it is an encouraging sign that it seeks dividends globally. Its sector composition is markedly different to the other funds here, with a 26 per cent weighting to financials. Although this represents a 6 per cent overweight relative to benchmark, it is considerably higher than the other funds in this review. In this instance you need to trust that the ClearBridge ‘value investing’ process is avoiding value traps, as many investors continue to eschew stocks in the sector.
