InvestmentsMar 2 2015

Fund Review: Legg Mason ClearBridge US Aggressive Growth fund

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This $4.2bn (£2.7bn) fund is an Investment Adviser 100 Club 2014 member and is co-managed by Evan Bauman and Richie Freeman.

Mr Bauman says they are high active-share stock pickers “who focus on companies with sustainable, growing cashflows and strong balance sheets and insist on not overpaying for that growth”.

The manager explains: “As a result of our patient and selective process, our portfolio looks very different from the market. We manage the fund as long-term business owners, which contribute to our low turnover and holding periods that average 18 years. We watch a company for a long period and wait for an attractive entry point before initiating a position. We start with a small weighting and increase the position size over time as its business grows.”

He cites Idec Pharmaceuticals as an example. It was first purchased by the fund in 1991 and then went on to merge with Biogen in 2003. It is now the top holding in the portfolio, he points out. “We have maintained a consistent investment approach for the past 30 years that has produced sustainable growth through a variety of market conditions and economic cycles. Our fundamental research process has evolved during this period as we find new ways to analyse the companies that are creating markets or taking share through innovation.”

Mr Bauman says that stock selection is not based on macroeconomic trends, but on individual company fundamentals and valuations. “While we monitor broader economic developments – such as the end of quantitative easing, the prospect for higher interest rates and a strengthening US dollar – we spend most of our time on the companies we own,” he notes.

There have been a few recent changes to the portfolio, although the manager observes that he and Mr Freeman view volatility as “offering opportunities to add to existing positions at attractive prices”. They have been putting significant amounts of cash to work during what he refers to as “temporary market dislocations”, citing the recent decline in the price of oil and the sell-off last year in the biotechnology sector.

The fund is ranked at level six out of seven on a statutory risk-reward profile, and the accumulation ‘premier’ clean share class has ongoing charges of 0.80 per cent.

Mr Bauman says: “Our job as growth managers is to find stocks that can grow well in excess of the general economy, and we have been successful in owning growth companies that are driven by innovation, market share gains and the ability to generate healthy levels of free cashflow.”

The fund has outperformed both the IA North America sector and its benchmark, the Russell 3000 Growth index, across three and five years, data from FE Analytics shows. It returned 126.86 per cent across five years to February 23 2015, against the sector average of 94.10 per cent and 118.62 per cent generated by the index. In the 12 months to the same date, performance of the fund has dropped off slightly as it delivered 20.86 per cent to investors, compared with 22.39 per cent by the sector and 26.08 per cent by the index.

He points out: “We don’t actively manage to a benchmark but instead look for the best sustainable growth stories that we can hold for years. As a result, our portfolio does not look like the market, which is currently reflected in an overweight to the energy sector. Due to our energy exposure, the sharp decline in the price of oil from $100 to less than $50 has had a negative impact on short-term performance. We have owned several of our largest energy positions for more than 11 years and remain confident in their ability to weather near-term volatility in commodity prices.”

Meanwhile, Mr Bauman thinks the portfolio has benefited from strong growth in healthcare and parts of the technology, media and energy sectors.

“Entering 2015, we expect a tougher period for equities broadly and a more difficult stock-picking environment,” the manager predicts. “The likelihood of higher interest rates and continued strength in the dollar should lead to more volatility. Nevertheless, we expect many of the trends that drove our portfolio companies this past year – such as innovation, share buybacks and merger and acquisition activity – could continue this year.”

EXPERT VIEW

Martin Bamford, chartered financial planner and managing director, Informed Choice

Offering first-quartile returns across three and five years, this is a fund that consistently adds value in an often challenging equity sector for active fund managers. The portfolio offers a long-term, buy-and-hold investment strategy – the managers attempt to identify influential firms in their early stages of growth, buy them and hold them. Sector and stock weightings are ignored during the portfolio construction process, which results in a high active share. For investors who prefer truly active fund management and a high-conviction approach, this is a great fund to consider.