Several factors have worked in the portfolio’s favor. For instance, it gained over 34% in 2019 — outperforming the MSCI EAFE Index by some 12% and putting it in the 14th percentile vs. its non-U.S. developed growth peers.
“During the year, the team’s tilt toward companies with low earnings variance was rewarded as stock picking was positive in nearly all sectors,” according to Envestnet analysts. “The team’s nearly 10% overweight to the IT sector and stock picking within the sector propelled results.”
Looking at the financial sector, the ClearBridge team had an underweight position in European banks and a tilt toward Asian insurance companies. Its holding in the London Stock Exchange jumped over 100% last year.
Since 2013, this group has produced yearly alpha of over 5% and had an upside/downside capture ratio of 104%/70%, Envestnet says. This put it in the top decile of its peers over the last three- and five-year periods.
The portfolio team believes market participants incorrectly assume “a normalization of earnings over a two-to-five year period … by over-emphasizing near-term earnings and underestimating the magnitude and/or duration of earnings growth, creating mispricing,” said Envestnet analysts.
Elisa Mazen leads the portfolio, and its holdings are aligned with three growth buckets — emerging, secular and structural. “We are fundamental investors and believe we’re very good at buying growth stocks that will outperform the market significantly,” Mazen said.
The team delivers results via a bottom-up process. As for its outperformance in 2019, “The driver was stock selection, which validates our philosophy, process and all we do,” she said.
Mazen points to gamemaker Nintendo of Japan: “We had added it back in 2018. We felt that that was a very interesting story that was not being fully understood.” Last year, it “was a significant performer,” she explained “That’s continued to be the case into 2020.”
As the team became concerned about the length of the economic cycle, it felt “our more cyclically oriented stocks were very fully priced” and started to sell some holdings — most notably in energy — in late 2019, she said. “We felt there was a transition from certain energy [resources] to alternative fuels that’s far more interesting.” It recently added some holdings, such as a renewable energy firm in Portugal.
The portfolio also invested in technology firms that, like Nintendo, benefitted from pandemic-related behaviors of sheltering in place and working from home.“They’re very high-growth stocks, and we feel they will compound at very high rates,” she explained.
Healthcare was another area for new holdings over the past year and a half. Overall, its diverse holdings also “did protect nicely on the downside,” Mazen added. “That’s something we think is a hallmark of our strategy, though … we’ve also done quite well during the up period.” — Janet Levaux