Evan Bauman concedes the Legg Mason ClearBridge US Aggressive Growth Fund is not for the faint-hearted.
“If on a daily basis you want the S&P plus or minus a couple of basis points, that is not the way the return profile of this fund works,” he says.
Bauman has co-managed the Sicav with Richie Freeman since it was launched in 2000, with the Ucits structure mirroring the US mutual fund of the same name that dates back to 1983.
The pair have faced a turbulent time during the past five years, with the $2.5bn fund consistently underperforming its benchmark, the Russell 3,000 Growth Index.
Market kicks
The fund last overtook the market in 2014, heralding a period of instability in which returns dipped as low as -5.22% in 2015, compared with the index’s 5.09% during the same period.
“Last year was difficult. We put a lot of pressure on ourselves to beat the market each year. But the way we invest, we are going to have difficult periods. The key to surviving the down times is holding on to clients,” says Baltimore-based Bauman.
He attributes the poor performance to its themes of healthcare and energy being hit hard by market volatility, driven by political, macroeconomic and interest rate risks.
With more than a third of its assets in healthcare, the vehicle’s largest holding, the biotech company Biogen, lost more than 25% of its value in the second half of 2015, and has continued to be volatile in 2016.
The fund had not experienced this level of losses since the height of the global financial crisis in 2008, says Bauman, adding it has been tough “holding clients’ hands through difficult periods”.
“The single toughest year was 2008, in terms of absolute investment losses. It was clearly the most difficult period for global equity, and global markets in general. The challenge is making sure clients remember why they invested in the first place.”
Contrarian approach
“Everybody says they are a long-term investor until the difficult years hit,” adds the veteran fund manager.
Bauman’s active approach is demonstrated by the co-managers’ “96% active share strategy”, which represents the proportion of the portfolio invested outside of the Russell 3,000 index.
Growth has picked up during the past three months and the fund is on track to surpass its benchmark in the coming quarter. Bauman is optimistic: “After bad years, we get the best years.”
The Ucits fund’s long-term track record is impressive, having beat the index by nearly more than double since its inception in 2000, with returns as high as 15% some years. Cumulatively over the past three-years, it has returned 22%.
“This is a fund where, if you bought us when we were down, you have made a tremendous amount of money.”
Describing co-managing the fund as at times a “thankless job”, Bauman credits its successes to the co-managers’ contrarian approach, which involves “letting value dictate”. “Being contrarian is, in some cases, a lost art today. There are a lot of trend following managers. We are very long-term investment managers.
“A lot of the companies we own today we have held since the ’80s and early ’90s. We are the top shareholders in everything we own. We were holding a lot of cash last summer, with the expectation that the market was at an unsustainably low level of volatility. Today, cash is less than 2%,” he says.
Longevity
The top 10 names out of 74 holdings have been in the fund for many years, reflecting a portfolio turnover of just 5%, mainly as a result of M&A activity.
One of its most successful ongoing holdings is SanDisk, a California-based manufacturer of flash memory products, which has had a place in the portfolio since 2001 when its share price was in single digits. In May, SanDisk was acquired by hard drive manufacturer Western Digital in a $19bn deal for more than $70 a share.
Bauman has recently increased the fund’s position in Western Digital, alongside a sizeable purchase in Twitter following rumours of a potential buyout.
“SanDisk was not without its volatility. Remember, the key is buying more when shares get cheap, as long as the balance sheets are sound. SanDisk and Biogen are both firms that had great balance sheets, that went through volatile periods, but were clearly two of the big home runs,” he says
Speaking of Biogen, it was bought as a “sub-$2 stock” back in 1991 and today trades at nearly $300, says Bauman proudly.
