Clearbridge avoids US consumer as growth ‘challenged’

Clearbridge’s Evan Bauman is avoiding investing in the US consumer sector after warning that US economic growth will be more “challenging” than most predict.

Mr Bauman, who has been managing the $1.5bn (£920m) Clearbridge US Aggressive Growth fund with Richie Freeman for the past 17 years, said many consumer-focused stocks were looking expensive.

Mr Bauman said the “economic backdrop will remain challenging” for investing, even though he expected the US Federal Reserve to remain accommodative towards the market.

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But he claimed certain portions of the market, especially those focused on consumers, were “priced based on a sustained US recovery” and those stocks could “disappoint”.

The Clearbridge fund currently has no money in the consumer staples sector and a big underweight position compared to the index in consumer discretionary names.

While the Dublin version of the Clearbridge fund was launched in 2000, the firm, a subsidiary of Legg Mason, first launched the US Aggressive Growth fund in the US in the 1980s. It has since grown to more than $7bn due to its consistent outperformance.

It has achieved this through long-term holdings in stocks that deliver growth through what the managers term ‘disruptive innovations’ – products and services that displace earlier technologies. Mr Bauman said the consumer staples and consumer discretionary sectors lack this characteristic.

So far this year the US stockmarket has suffered along with global markets, mainly due to fears there may be a sustained crisis in emerging markets.

Disappointing data on US manufacturing in January exacerbated the sell-off, as investors began to realise the US may not be on quite as sound a footing as previously hoped.

Mr Bauman said he was “not shocked” by the market falls and he thought a “market correction” was “overdue”.

The manager said that while he had not predicted when the sell-off would come, he had expected a pullback, which was reflected in his decision to increase his cash weighting.

“Cash this year was higher than over the life of the fund as the market was overdue a correction, which is not unusual,” said Mr Bauman.

Among the stocks Mr Bauman has added to is Cree, an LED manufacturer. Mr Bauman said Cree had suffered a pullback along with the rest of the market, but expected revenue growth of 25 per cent because the phasing out of incandescent bulbs in favour of LEDs would be positive for the company.

He has also added significantly to companies within the media industry, particularly those producing what he considers strong TV content, such as Discovery and AMC Networks.

Although the healthcare sector remains by far the largest portion of the fund, comprising 31.1 per cent of the portfolio as at the end of 2013, Mr Bauman said he had not been actively adding to positions in the sector recently, having bolstered exposure midway through 2013.

However, he insisted the sector, particularly the biotechnology area to which the fund is tilted, was not due a further correction, even though it had risen strongly in recent years.