A big talking point within the asset management world so far this year has been the concept of “active share”. Disclosing a fund’s active share figure, which measures the commonality of a portfolio with its benchmark, is fast becoming a popular tactic among groups eager to prove to investors their products are not closet trackers.
In the past few weeks alone, Woodford Investment Management, Threadneedle, Neptune and Baillie Gifford have all published figures for the first time, ranging from between 70 and 99 per cent (where 0 implies a portfolio is identical to the benchmark and 100 shows no holdings in common).
Fund managers in the US have been slightly ahead of the pack when it comes to disclosing their active share and ClearBridge Investments is one particular advocate. Investors on the hunt for a truly active US equity vehicle would do well to look in the direction of the Legg Mason ClearBridge US Aggressive Growth fund, which boasts an active share of 94 per cent.
Launched in 2000, it is currently one of the biggest funds in the IA North America sector at £3.2bn. Managers Richie Freeman and Evan Bauman describe themselves as “long-term business owners” with one of the lowest turnover rates in the industry. The strict buy and hold discipline has served them well: the fund currently sits second place in the sector over both three and five years, and fifth over ten, according to FE Analytics.
Its biggest turnover activity comes from takeovers, which has been one of the main performance drivers of the past few years. Thanks to “tremendous” M&A activity in certain sectors, the managers have witnessed 63 takeovers since the fund’s inception.
“When something’s taken over, that’s good turnover. These companies wouldn’t have been taken over if they weren’t good, so that’s helped us a lot,” says Freeman.
The fund is typically invested in between 50 to 70 holdings, with 50 per cent of assets making up the top 10. Stocks are focused on four main areas: healthcare efficiency, cable and media, enabling technologies and energy.
Within the healthcare efficiency bucket, biotech is the most dominant theme. The fund’s top holding, at 8.8 per cent, is Biogen. Founded in 1978, it is the oldest independent biotech firm, with a market cap today of $71bn. The managers bought the stock as IDEC Pharmaceuticals on IPO in 1991, which then merged with Biogen in 2003.
Enabling technologies is another interesting area. Perhaps its biggest differentiator, the fund has no exposure to technology behemoths Apple, Google and Amazon. Instead, the managers prefer to play the theme via storage and connectivity.
Top 10 holding SanDisk, for example, supplies (among other things) embedded storage for tablets and smartphones produced by Apple and Samsung. Over the 13 years since the managers first purchased the stock, SanDisk has grown its market cap from $500m to over $21bn.
This year will be an interesting one for both the US economy and stock market, with an interest rate rise widely predicted to come in the next few months. This, coupled with the continued strength of the dollar, could provide a tough environment for US equities.
As it stands there are already murmurs of a bubble brewing. The S&P has trebled in the last six years and valuations across the board have looked high from some time.
While Bauman admits the valuation issue cannot be ignored (it has become an obstacle when looking at some of the smaller biotech names, for example), overall he is fairly unfazed by the bubble talk.
“We have let cash build up at certain points in the last year but we are comfortable our holdings can climb from here. Our investment style sees us hold stocks for long time – by that, we mean as long as 20 years – so we can still see opportunities,” he says.
The managers are also confident the fund can withstand the macro headwinds forecast for the next few months.
We do not base stock selection on macro trends but on individual company fundamentals and valuations,” says Bauman.
“We expect many of the trends that drove our holdings this past year, such as innovation, share buybacks and M&A activity, could continue this year. You also have to consider that the recovery in the US is ongoing. With that backdrop still favourable and a lack of alternatives around, equities will still offer a viable option for some investors.”