Legg MasonOct 17 2016

Fund Review: Legg Mason IF Clearbridge US Equity Income

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Fund Review: Legg Mason IF Clearbridge US Equity Income

This £95m fund was launched in 2011 as the UK onshore version of an existing strategy that had been running in the US since 2003. Managed by the ClearBridge Investments trio of Mike Clarfeld, Peter Vanderlee and Hersh Cohen, the vehicle aims to deliver income and capital growth through a portfolio of US equities and equity-related securities.

Mr Clarfeld notes the fund may differ slightly from some traditional income funds found in the UK and Europe, with a focus on high-quality companies where returns can be compounded over the long term.

The manager explains: “We’re focused on three things. It’s a nice upfront yield combined with powerful dividend growth and doing it in a low-risk conservative manner. [We’re looking for] an attractive dividend yield, but it’s not going to be the highest for two reasons: we don’t want to stretch for yield as we think that’s dangerous, and we don’t want to lose sight of what we feel is the real attractiveness of equity income, which is dividend growth.” 

He adds that while the dividend is a key part of the approach, “equally as important is an assessment of the business and the industry to determine [if] the superior economics the business enjoy – [which is] reflected in higher returns and margins – are sustainable over the long term”.

The strategy has accumulated roughly $15bn (£12.1bn) in assets since its launch in the US, with the style and focus remaining consistent in the period. The manager points out the fund’s turnover is roughly 20 per cent a year, but “we still own many names in the portfolio that we first bought in 2003”.

As active investors Mr Clarfeld notes there are always changes on the margin, but stresses “we’re not thematic investors, you won’t see us retool the portfolio for a certain kind of trade”. Instead, the team has more recently been adding to companies that have self-help stories, or have experienced mergers with accompanying cost-reduction opportunities, as well as those where activist investors have become involved and inspired management to move more aggressively.

Ongoing charges for the A income sterling share class are 1.31 per cent, while the fund sits at a risk-reward level of five out of seven, the vehicle’s key investor information document shows.

The portfolio has delivered a positive return of 101 per cent in sterling terms in the period between inception of the share class on October 17 2011 and October 6 2016, data from FE Analytics shows. This is slightly behind the IA North America sector average return of 117 per cent and the Russell 3000 Value index’s gain of 140 per cent. The fund switched its benchmark to the S&P 500 index on October 6.

In terms of performance, Mr Clarfeld notes: “We had a challenging 2015 and we’re having a strong 2016. Our challenging 2015 happened because people were getting ready for rising rates and our stocks got caught in the downdraught.” Subsequently he points out two things have happened; investors have realised that the pace of interest rate rises in the US will be gradual, and “if you are positioning for rising rates then dividend growers is the solution not the problem”. 

Contributors to performance have been mostly stock-specific, although a sizeable position in consumer staples has generally performed well with lower interest rates. 

The manager says: “Generally it’s been good, [although] one stock that’s been challenging for us is [US insurance firm] MetLife. We think it’s doing all the right things, [but] as a life insurance company it needs higher rates, and as interest rates have been depressed it has weighed on [the business]. We own it because we like it, but also from a portfolio perspective as it will be a powerful beneficiary when interest rates rise, so you have to look at the wider portfolio.”

Mr Clarfeld also highlights the broad and diverse dividend market in the US as the dividend culture improves, pointing to the large allocation to technology “that might be harder to do in certain markets”. He adds: “It has opened up more opportunities; technology is a great example of that. If you were a dividend investor 10 years ago there was nothing you could hold in technology. Now it’s a challenge, but there is more.”