Bill Orke Bill Orke

WCM Quality Global Growth Strategy includes about 30-35 holdings. “The crux of WCM’s investment process lies in its ability to identify companies that possess a demonstrable competitive advantage over peers (i.e., economic moats) … ,” according to Envestnet | PMC analyst Dan Homan.

The investment team spends most of its time attempting to forecast the trajectory of this competitive advantage, Homan explains: “This is WCM’s key differentiating characteristic and what has led to remarkably strong performance relative to indices and peers.” Plus, the portfolio’s beta has been 0.84, lower than that of a major global index.

According to Bill Orke, a portfolio specialist with Laguna Beach, California-based WCM Investment Management, the winning portfolio is “essentially … that of a high-quality large-cap traditional growth strategy for the global universe … designed chiefly to protect [against] the downside in the marketplace.”

Much of the strategy’s success, Orke says, relies on its fundamental bottom-up approach. The portfolio also has been benefiting from “some broad tailwinds,” including the recent outperformance of growth vs. value. “That’s been going on for a while, [and] we think that there’s more runway out there in that area,” he explained.

Digging into stock selection, technology has been the portfolio’s “strongest bet, performing quite well,” the portfolio specialist explains. In addition, the strategy has underweighted three underperforming sectors, “which was highly beneficial” in 2017, he points out — telecommunications, utilities and energy.

The healthcare and consumer sectors also have supported performance. Thanks to global growth, these industries have “a really nice tailwind which complements the great fundamental bottom-up work we’re doing around economic moats,” he says.

But, both Envestnet and WCM analysts emphasize, the group’s fundamental bottom-up analysis around that makes it distinct and successful. In Orke’s words, “We put a lot of emphasis on whether or not the [company’s] economic moat is growing, and if these organizations are actually competing and winning within their industry group and amongst their peers.” This performance is critical, he explains, because it can bode well for corporate valuations. “In other words, they demand higher [price-to-earnings ratios], and there’s a lot of wealth creation along the line,” he said.

Last year, the portfolio specialist says, was the ninth consecutive year of positive performance for WCM Quality Global Growth Strategy: “That’s not easy to do in our industry, so we’re … proud of that.”

But the strategists at WCM are grounded in a forward-looking approach. “We build portfolios that are … built around where we think the markets are going,” Orke said. The group also puts a lot of emphasis on understanding the corporate culture of its holdings.

“We think the DNA of the organization is critical to understanding these organizations” in order to find sustained, long-term results, he explained.

While a firm’s products, services and other output are key, “We really work hard to kind of put all of that mosaic together and then identify those [great] ideas,” he added. And if one of those ideas doesn’t work out, the investment group “takes the opportunity to learn, to grow and to continually learn and really have some broad and audacious thought processes,” Orke said.

To support high performance and consistency for its investment team, WCM offers staff an ownership stake in the firm. “We’ve pushed out equity, we tie people to the bottom line, and we’ve taken the opportunity to allow them to feel vested in the organization and to be able to grow within our organization, make contributions and participate in the success of the organization,” he explained.

Benedict Buckley Benedict Buckley

Launched in 2006, the ClearBridge Large Cap Growth ESG strategy is led by a portfolio management team that includes Mary Jane McQuillen, a longtime leader in the field, according to Envestnet | PMC analyst Eric Halverson and Jessica Lowry of Veris Wealth Partners.

The strategy relies on a “best in class” approach to environmental, social and governance integration, the analysts say; plus, the ClearBridge team has its own ESG rating system, which “informs [its] fundamental analysis, security selection, corporate engagement and proxy voting.” In addition, ClearBridge portfolio staff members believe that large companies can drive positive ESG impacts “by being intentional active investors” through both their allocation of capital and direct engagement with corporate management teams, Halverson and Lowry point out. Some of its meetings, for instance, have dealt with ESG issues like water use, supply-chain labor standards and board composition.

ClearBridge’s ESG investing programs date back to 1997, according to Benedict Buckley, vice president and equity analyst. “We are one of the longest-tenured firms in this space, and the approach we have is not that of a separate team doing some research around environmental or social governance issues on the side. It’s actually being done across the firm by all of our portfolio managers and all of our analysts.”

The firm aims to stay invested in the strategy’s holdings “for the long term —up to five years, preferably more if we can,” he says. These holdings are “really high-quality businesses that we think are mispriced in the market and also are exhibiting positive criteria from an ESG perspective.”

Recent performance, Buckley notes, has been driven by information technology firms such as Amazon and Alphabet (previously Google), as well as Red Hat, Adobe Systems and Akamai Technologies. “There’s this secular transition to cloud [computing], and these companies are benefiting from that move,” he explained.

Strategists and analysts working on the ClearBridge Large Cap Growth ESG portfolio focus on three different buckets of growth. The first includes stable-growth companies, meaning those of high quality that may be trading at “somewhat of a premium to the market but [with] relatively limited downside” risk, like UnitedHealth or Home Depot, Buckley says.

The second bucket encompasses select-growth companies, which are more “momentum-type tech names,” such as firms like Amazon. And the third bucket is for cyclical-growth firms, according to Buckley; these are companies with earnings that are “depressed at the moment for various reasons … that we can see growing meaningfully over the coming years.”

The benefit to these three growth buckets is that the ClearBridge portfolio can hold its own in different market environments, he states, such as those that arose from 2012 to 2016: “This portfolio is able to outperform in every single one of those, when actually only about 1% of large-cap growth managers [could] do that in all those years.”

Amazon and its web-services business have “a substantial impact in the environmental space” through the growth of data centers and their energy use, Buckley says. The company used renewable sources for about 40% of its energy use last year, and has a target to hit 50% this year and aims to get to 100% in the long term.

Google employs IT resources like artificial intelligence and machine learning to help it reach ESG goals. “They’ve managed to reduce their energy costs for cooling the data centers by 40% percent by building algorithms around how to manage to optimize the energy use,” he explained.

In general, ClearBridge analysts communicate regularly with the management teams of firms in its portfolio. “We have over 1,000 meetings a year with CEOs and CFO of companies,” Buckley said.

Because the firm is a large shareholder in some of its holdings, it has “great access to the management teams,” he explained. “They know we’re long-term investors that have the same ultimate goal as they do — to see the company be successful.”