We get asked all the time about money managers who have done well over the longer-term, and one that comes to mind is the Legg Mason Clearbridge Multi-Cap Growth strategy. This could be one to consider now as part of your long-term strategy. We believe many investors would be pleased to come across a manager with a track record like this and we’re happy to recommend it when appropriate.
This month’s newsletter will give you some insight into the strategy and people behind it in plain and real terms, hopefully painting a picture of the manager you’ll enjoy.
Introducing the Multi-Cap Growth Strategy
You might think of the Multi-Cap Growth strategy as similar to something in your life that takes years to develop. It could be your own business, a garden or even a career. All of these can take time, integrity and dedication to make successful. This portfolio’s strategy is to hold companies for the long term, in an effort to allow their strategies to play out and deliver results. One where sometimes the best new ideas are companies they already own, which may mean adding to existing positions. This is not only reflected in the strategy, but also in the people behind the strategy.
Even though this is a long-term strategy, there are risks with any equity strategy. A strategy may do well over the long-term, but there may be periods of negative performance. Investors should have a good understanding of their financial situation, time horizon and risk tolerance before making any investments.
Meet the Managers
When you hire a money manager, you’re not only investing in the holdings of that strategy, but also investing in the people behind the strategy. Not just the performance or name, but the individuals who run the strategy and give credibility to the firm name. That’s why we think it is helpful to understand and sometimes even meet these key people.
We’re excited to introduce Richard Freeman and Evan Bauman. It’s hard to believe they have lives outside of managing money given their determination with the Multi-Cap Growth strategy. It’s usually a good sign when the portfolio managers have been with the strategy for a long time.
The man in charge of the Multi-Cap Growth strategy is Mr. Richard Freeman, Senior Portfolio Manager. ‘Richie’ became fascinated with the stock market at age 13 when he would sit in a local brokerage firm after school and watch the stock ticker. Fast forward to today and he has been a portfolio manager for this Multi-Cap Growth strategy since 1991! This is what we like to see in a manager. In addition to an impressive resume, he has an MBA in Finance from the Stern School of Business at New York University and a BS in Accounting from Brooklyn College.
Co-managing the strategy is Evan Bauman, Portfolio Manager. He joined the organization (one of its predecessors) in 1996 as an intern and has spent his entire career there, over 14 years!
Strategy Overview
Richie believes a true growth strategy invests in growth stocks that can be held for many years, allowing them to develop, not just stocks categorized as growth. That’s why investors seeking a truly long-term growth strategy with the ability to invest in all market capitalizations may want to consider the Multi-Cap Growth strategy. As always and like most of our clients, your overall financial portfolio should be well diversified using multiple money managers and styles.
The strategy typically holds approximately 30 securities, which is a bit more concentrated than many other strategies out there. As a long-term strategy, the companies are allowed to remain in the portfolio as their plans come to fruition over a few or several years. Thus there is no size limit for companies (measured by market cap) as an increase in size may be indicative of their successes! Take for example Genetech, which they held since 1991 and only recently sold when it merged with Roche.
Performance History
The Multi-Cap Growth portfolio demonstrates why it can be beneficial to focus on the long term and let the strategy play out. At the end of 2010, it had significantly outperformed the benchmark Russell 3000 Growth Index for not only fourth quarter and the full year, but for the three-, five-, 10- and 15-year periods as well. The portfolio produced positive returns over the 10-year period from 2000-2009 (the so-called Lost Decade), while the benchmark fell in the face of two severe bear markets.
The below chart shows the calendar year returns net of fees for years 2001-2010. As you can see, there were two periods of larger underperformance in 2002 and 2008. We believe this highlights the importance of investing for the long term if appropriate and you’re your goals and time horizon in mind.
One final way of looking at the performance of the Multi-Cap Growth is seeing how an investment of $1,000 would have performed over time since the strategy’s inception.
In our previous news letter Choosing a Money Manager: What You Need to Know, we stressed the importance of comparing money managers to their peers. The Legg Mason Clearbridge Multi-Cap Growth is ranked in the top 1% of performance for Large Cap Growth strategies over 1-, 3-, 5- and 10-year period and since its inception for periods ending 12/31/2010, as categorized by Informa Investment Solutions, a third party database of investment managers.
Stock Selection
Understanding how companies are selected is important, even if it can get a little mundane. It can also help you better understand the portfolio managers and their thinking.
A list of companies with the potential for above-average long-term earnings and/or cash flow growth is generated. Richie and Evan are interested in companies that produce products people are compelled to actually use. Other characteristics they see as favorable include strong balance sheets and material management ownership stakes. They also look to see if any of the companies are effectively on sale, i.e. inefficiently priced by Wall Street. Each company generally has a story behind it that compelled the purchase. The now complete portfolio is reviewed continuously to ensure that the reasons they bought the stocks still apply.
Biogen IDEC Inc. makes up approximately 6.7% of the portfolio as of 12/31/2010. It’s a biotechnology firm in the health care sector that produces therapies in the areas of oncology, neurology and immunology. They believe a more focused research and development effort should add significantly to earnings and cash flow and help to prioritize important clinical programs. They also believe this will benefit the company over the long term.
Why Would They Sell a Stock?
Richard and Evan might sell a position if a new and better idea comes along or when they believe there is a significant possibility of a long-term deterioration in fundamentals for the company or industry. They usually will not sell a company purely based on its size, unless it affects their reasons they had for initially buying that stock.
The portfolio held two flash memory companies in the past: SanDisk and Micron. In 2007, Richie and Evan decided not to have two flash memory companies in the portfolio and sold Micron, preferring SanDisk’s management team and financials. Keeping SanDisk also illustrates how they look at the different pieces of broader themes. Instead of owning Motorola, Apple, or even Microsoft, they hold SanDisk which makes memory cards that those companies use.
What to Do Next?
Interested in the Multi-Cap Growth strategy? Give us a call or click here to request more information. One of our Wealth Strategists will be in contact with you shortly. It’s important to remember that this strategy is not suitable for everyone. Each financial situation is unique and needs to be assessed before deciding if this strategy is right for you.
If you’re not comfortable with this strategy, don’t worry! We have several other money managers that we can match to your needs and risk tolerance. To get started, request our free Top Equity Money Managers for 2011 here where you’ll find brief descriptions of 9 money managers we like for 2011. Or if you’re eager and ready to start now, give us a call at (800) 541-7774.
Legg Mason Clearbridge Multi-Cap Growth is ranked in the Top 1% of Performance of managers in the Large Cap Growth Universe as categorized by Informa Investment Solutions for the time periods ending December 31, 2010. Not all money managers report their data to Informa Investment Solutions nor are all managers categorized under the same universe. Managers who do not report to Informa or that are not categorized in the same universe have not been taken into consideration for this ranking. Money managers provide their performance data directly to Informa Investment Solutions. While WrapManager, Inc. believes the information presented by Informa Investment Solutions is reliable, WrapManager, Inc. is not responsible for any damages or losses arising from use of this information, and does not assume any liability for erroneous information provided by such companies. Portfolio management information and portfolio manager background descriptions based on information sourced directly from Legg Mason Clearbridge. Net of fee performance calculations reflect the deduction of a 1.50% annual fee assessed quarterly in advance which reflects the typical fee charged by WrapManager for this particular type of account and manager. Please review our full disclosure brochure for complete fee details.
The Russell 3000 Growth Index measures the performance of the broad growth segment of the U.S. equity universe. It includes those Russell 3000 companies with higher price-to-book ratios and higher forecasted growth values. Indexes are used for illustrative purposes only. An investor cannot invest directly in an index. As such, index returns do not reflect deduction of any fees.
While we believe that diversification in an important aspect of a proper investment plan, diversification does not guarantee a profit or protection against loss in a declining market. Past performance is not indicative of future results. Therefore you should not assume that the future performance of the strategies mentioned here or any investment will be profitable or equal the corresponding indicated performance levels. Stock and bond values fluctuate in price so that the value of an investment can go down depending on market conditions.
Strategies used by Money Managers listed above are not suitable for all investors. This material is being provided for informational purposes only and is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. It does not represent a personalized recommendation and does not reflect individual investor’s risk and return goals nor does it serve as the receipt of, or a substitute for, personalized advice from WrapManager, Inc. or any other investment professional.
WrapManager, Inc. is an investment advisor registered with the SEC. The associated persons of WrapManager, Inc. may also be securities agents with Prospera Financial Services, Inc., a registered broker/dealer, member FINRA/SIPC. Securities offered through Prospera Financial Services and cleared through First Clearing, LLC. which is an affiliate of Wells Fargo. WrapManager, Inc. Wells Fargo and the individual money managers mentioned in this report are not related entities. However, WrapManager does recommend the use of the money managers presented to clients.