ClearBridge Investment's Peter Bourbeau and Margaret Vitrano provide their perspective on the second quarter discussing their large cap growth portfolios.
"As with stocks, the U.S. economy continued its slow march forward through the second quarter. Employment continued to lead the way, with payrolls increasing by an average of 221,000 per month, and the unemployment rate declining to 5.3%, its lowest level since April 2008. Consumer spending and new and existing home sales showed healthy improvement in May, while consumer confidence bounced back late in the quarter. The CEO of a major retailer we spoke with during the quarter indicated that consumers are now feeling good enough about their finances to expand purchases from basic staples to higher-priced apparel and home furnishings. Offsetting those gains were disappointing reports on GDP growth, with the final revision to first-quarter data showing that the economy contracted by 0.2% in the three months of the year, as well as industrial production.
The mixed domestic economic picture is less of a concern for U.S. multinationals than the ongoing softness in global demand. Spending in the emerging markets, a major demand driver for companies like Coca-Cola and Eaton Corp., remains weak, while the sustained rise in the U.S. dollar makes it more difficult for borrowers to service their dollar-denominated debt. And as we explained last quarter, a strong greenback has caused many of the export-driven large-cap companies we own to lower their earnings estimates for the year. On the bright side, dollar strength could cause the Federal Reserve to maintain its cautious stance on rates. Fed Chair Janet Yellen asserted in June that the committee still needs to see further improvement in labor markets, wages and inflation before tightening policy.
As the global economy muddles along, we have repositioned the portfolio for an expected low-growth environment by trimming positions in some of our select, higher-beta growth stocks and adding to more stable growth companies with dominant franchises and consistent cash flows. We are maintaining our existing exposure to cyclical growth companies, which consist primarily of energy stocks, as we believe that the names we own have the fundamentals to gain share as commodity prices stabilize.
Our commitment to owning a range of growth companies is a key differentiator from other growth strategies and is now reflected in more significant sector variances for the portfolio compared with our benchmark. Following the annual rebalancing of the Russell indices in late June, energy now represents less than 1% of the Russell 1000 Growth Index, down from 4.5% previously, while health care represents over 18%, up from 14.5%. As a result, our energy overweight has increased, while we now have an underweight to health care. We point out these differences to illustrate that fundamental views of individual growth companies, rather than formulaic, market cap-based rules, guide our portfolio construction. An emphasis on quality growth companies proved beneficial to the portfolio during the second quarter, and we believe the fundamental strength of such stocks will enable them to continue to deliver above-average growth over the long term." Download the full report below.
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