HEAD-TO-HEAD: Legg Mason vs Schroders

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Investment approach

The two funds clearly have different investment universes. Legg Mason Clearbridge aims to generate long-term capital appreciation through holdings in a concentrated group of large cap US companies that dominate their industries and have global reach.

In contrast, at least two-thirds of the Schroder fund’s portfolio can be invested in small- and mid-sized companies that are in the bottom 40% by market capitalisation in the US equities market.

“However, both funds adopt a cautious style. Although they seek growth, neither fund has a high beta, which provides them with a cushion during market declines. They both also have a bottom-up stock-picking approach,” said Tambe.

He identifies three tactical “buckets” that guide the Legg Mason Clearbridge strategy. The first includes non-cyclical stocks that evince stable growth and can benefit from disruptive technologies to improve earnings. The second are cyclical stocks, which typically comprises a quarter of the portfolio, but have been reduced as the economy nears the end of its growth cycle.

The managers are allowed more flexibility within the third bucket and can make more aggressive selections.

“Management quality is as important as financial ratios in their investment approach,” said Tambe.

The fund’s largest allocations are to the technology, consumer products and healthcare sectors. However, its biggest individual holdings are in dominant companies, such as Amazon and Microsoft.

“The fund is a core offering among the Legg Mason Clearbridge fund suite, so its primary emphasis is not growth at any price,” said Tambe.

The Schroder fund also differentiates between three discrete categories: companies that show strong growth trends and cash flows, but are mis-priced by the markets; so-called “steady Eddies” that generate reliable earnings and revenues; and recovering companies whose turnaround has often been prompted by a catalyst unrecognised by other investors.

“Plentiful free cash flow is the common criteria for stock selection within each category, so the fund usually avoids companies with high leverage or R&D expenditure,” said Tambe.

Both funds emphasise the importance of deep fundamental company analysis and valuation as the key determinant for stock selection.

Source: FE Analytics

*15 Jan 2016 – 16 Jan 2019    **18 Jan 2016 – 17 Jan 2019

Market Exposure:

Sector Weightings (31 Dec 2018)

Source: *Morningstar, **FE Analytics

Top 5 holdings (31 December 2018)

Source: *Morningstar, **FE Analytics

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