24th April 2013
Technology is no longer a natural overweight position in growth funds, due to the sector’s cyclical nature, competitive markets and low barriers to entry, according to Legg Mason asset manager ClearBridge Investments.
Evan Bauman, co-manager of the $427m Legg Mason ClearBridge US Aggressive Growth fund says his portfolio has been underweight the sector for several years.
“Many clients hear Aggressive Growth and think we need to overweight technology but we have an 18% weighting against 32% in our benchmark,” he says. “We always want sustainability of earnings growth but, when we look at the sector, we see very cyclical, competitive markets with low barriers to entry – even among some market leaders.”
The fund does have tech exposure including computing company Citrix is a large position, for example, as are data storage businesses Seagate and SanDisk.
Bauman and co-manager Richie Freeman have avoided Apple but say they have beaten 90% of managers in the growth space without it. “We have played a number of themes that have benefited Apple such as growth of storage companies like SanDisk. This business has created a market in flash memory that is used in Apple tablets and Smartphones. The key is SanDisk flash also supports other device ecosystems and they make Sold State Drives which will enable storage in laptops this year”
“We have chosen to own the growth in data and digital content rather than try to pick which device manufacturer wins the race to address consumer needs at any given time. You only have to look at previous market leaders that have lost big market share to see how fickle some of these more consumer-centric investments can be.”
“When some investors see 2-5% turnover on a growth fund, they question it, but we have found the best way to outperform is to have long term investments in companies that trade cheaper than the market and outpace it in terms of growth. All sector and industry weightings are dictated by stock selection and we hold onto companies based on fundamentals and growth characteristics, not what is in or out of the benchmark.”
Bauman adds: “The economies of the world are growing slowly so you want companies that can show true organic double-digit Earnings Per Share growth in those conditions,” Bauman says. A company that personifies this is US based Cree, Inc. Cree makes LEDs which are changing the way homes, offices and cities are lit using bulbs that produce 84% less energy than traditional incandescent bulbs.
“We are often asked whether we need to increase turnover in current markets and our view is that when managing with a longer-term horizon, volatility is actually your friend. What we try to do is use volatility to build positions, buying stocks when they are cheap and trimming when valuations are less compelling. We buy cheap and trim rich but own a core group of companies for the longer term.”