HEAD-TO-HEAD: Legg Mason vs Schroders

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Louis Tambe, FE Analytics

Introduction

The long, liquidity-fuelled bull run for US equities markets came crashing down in the final quarter of 2018. A series of interest rate hikes during the year and hawkish comments by Federal Reserve chair Jerome Powell in early October roused fears of a recession and drove investors out of equities and credit to find sanctuary in government bond markets and cash.

Powell’s more emollient tone at the start of this year reassured investors. They also highlighted the strength of US corporate earnings and their disconnection with the markets’ steep decline.

“Large companies, in particular, posted healthy earnings throughout last year and valuations began 2019 at attractive levels, with the S&P 500’s trailing price-earnings ratio falling from 33 to 30,” said Louis Tambe, fund analyst at FE Analytics.

Yet, the economic outlook remains precarious and any policy mistake by the Federal Reserve could induce another period of market panic.

In this environment, Tambe sees merits in both a large-cap and a small- and mid-cap investing style.

“Large-caps are monopoly-type companies that are the principal engine of the US economy. As such they are defensive during uncertainty and are vehicles for growth in the future,” he said.

“Small- and mid-caps in general are vulnerable to market volatility, but well-chosen stocks within a low beta strategy can be defensive and enjoy significant growth when the economy strengthens.

“The sector is also still enjoying the benefits of President Trump’s 2017 tax cuts,” he added.

FSA asked Tambe to compare two US funds with contrasting market cap styles: the Legg Mason Clearbridge US Large Cap Growth fund and the Schroder ISF US Small & Mid Cap Equity fund.

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