Stock markets are supposed to be quieter toward the end of year, but not in 2016. The knee-jerk panic induced by Donald Trump’s election as the new US president has sent markets up and down. The S&P 500 futures slumped as much as 5% after the results came out, although the index had picked up and trended higher when the market opened the next day.
Most fund managers shook off the event as short-term noise but voiced concerns on longer-term political risks after Trump takes office in January.
“Uncertainty will weigh on corporate behavior. Without any clear policy direction, capital spending will continue to be uninspiring and many companies may shy away from giving long-term guidance,” said a report from Bank of Singapore, which is underweight equities across all major regions including the US.
Meanwhile, investors are now awaiting the Federal Reserve’s decision on whether to raise the interest rate in December.
“If there is a large enough negative market reaction, the US Fed may delay its second rate hike beyond December 2016,” BOS said.
In a research note, Barings head of global equities David Bertocchi added: “Policy stability and respectable economic growth, two factors that underpinned strong rises in the US equity market in recent years, now appear at stake.”
Strong volatility is highly likely as Trump appoints his team and rolls out his plans in detail.
Against this backdrop, Lena Tsymbaluk, Morningstar’s London-based invesment research analyst, provides a comparative analysis of the Fidelity America Fund and the Legg Mason ClearBridge US Aggressive Growth Fund.
The two funds have different investment styles – Fidelity with a value strategy and Legg Mason focused on growth – but both result in a relatively concentrated portfolio with 50-70 stocks.
They also tend to be benchmark-agnostic, as reflected in active share, a measure of how far the fund deviates from its benchmark. Active share is 84% for Fidelity’s against S&P 500 Index and 93% for Legg Mason against the Russell 3000 Growth Index.
Their portfolios have distinct biases. “Fidelity is more diversified across various sectors, especially traditional “value” sectors such as financials, healthcare, industrials, energy.
For Legg Mason, “70% of the portfolio is in healthcare, especially biotech, technology and energy. [The manager] also feels comfortable having zero exposure in sectors such as consumer defensive, utilities, financials and real estate.”
Top 5 sector exposure (as of September 30)
|Fidelity fund (%)||Legg Mason fund (%)|
|4||Financial services||13.5||Consumer cyclical||14.2|
|5||Consumer defensive||8.7||Communication services||8.2|
The Fidelity fund “has a more pronounced valuation discipline. The manager seeks to purchase significantly undervalued companies that have a skewed risk/reward profile,” said Tsymbaluk.
“Typically these companies would have gone through a period of underperformance, where little value is ascribed to their recovery potential and therefore there is a strong relative upside and limited downside potential, in [the manager’s] view.”
Within the healthcare space, this fund “focuses on pharma stocks that have underappreciated drug pipelines, as well as on service providers that stand to benefit from healthcare reforms”.
However, for the Legg Mason product, healthcare has been a long-term overweight position and investments tend to focus more on biotechnology companies, she noted.
“The managers own biotech names such as Biogen, Amgen and Immunogen, where they believe opportunities for growth and innovation are substantial, while valuations also remain attractive.”
It has also held a structural overweighting in the energy sector for 10 years, she added.
“It is the buy-and-hold approach that gives the investments time to realise their full potential and boasts one of the lowest turnovers of its category.” The turnover ratio typically remains in the single digits, she said.
The fund focuses on companies with high growth rates across all market capitalisations, looking for companies with new or innovative technologies, products or services.
“The Legg Mason fund has a slightly higher mid-cap exposure as they aim to recognise companies in their early stages of growth, buy them and hold for a long time unless a serious fundamental change occurs,” she added.
This fund is a mirror version of the Clearbridge Aggressive Growth Fund, which is sold in the US (Clearbridge is a Legg Mason affiliate).
Managers of both the Fidelity and Legg Mason products are bottom-up stock pickers, so the portfolio composition is unlikely to be impacted in a rising interest rate environment, Tsymbaluk added.
Over a three-year period, Fidelity returned 31.79% versus Legg Mason’s 16.33%.
The Legg Mason fund “had a brutal 2015,” Tsymbaluk said, undeperforming the index by 10 percentage points and category average by 8 ppts.
“The underperformance was driven by the large overweighting to the poor-performing energy sector, as well as some biotech and storage names,” she explained, adding that the lack of big benchmark technology names such as Amazon, Alphabet, and Netflix also hurt.
However, a longer-term view gave a better picture. Since the fund’s inception in May 2000 through the end of September 2016 it has recorded an annualised return of 5.03% (in US dollars), beating the Russell 3000 Growth Index and the US large-cap growth category average by 1.9 and 2.7 percentage points per year, respectively.
The Legg Mason fund is the more volatile of the two products due to its high concentration.
“Top 10 holdings are more than 50% of the portfolio, meaning key positions accentuate the fund’s overall returns.
“The fund is also vulnerable to sector risk with its large active positions and underexposure to certain areas of the market.”
On the other hand, the Fidelity fund did well last year, “benefitting from good stock selection within the sectors where the manager has had an overweight in sectors such as technology and healthcare”.
The manager sees risk management as the core of the investment process. “The manager starts with the worst-case scenario for each company and seeks sufficient protection and margin of safety,” Tsymbaluk said.
Although manager Angel Agudo took the lead in June 2014, “his longer record at Fidelity American Special Situations, which adheres to the same investment process, is also strong,” she added.