The $6.8 billion ClearBridge Aggressive Growth Fund -- which
dropped Legg Mason from its name on Jan. 1 -- is a poster boy for
taking a long-term approach to investing.
Many of the fund's 58 stocks had been in the portfolio a
decade or more -- dating back to when the fund had the Shearson
and Smith Barney rubrics.
This fund's brand of long-term investing is a key reason its
performance ranks in the top 1% of its large-cap growth peer
group year-to-date and over the past 12 months. It's in the top
9% over the past five years and the top 26% over the past 10
The fund was up 15.82% this year going into Monday, vs. 8.79%
for its peers tracked by Morningstar Inc. and 10.61% for the
Over the past three years its average annual gain was 16.86%
vs. 10.82% for its peer group and 12.67% for the big-cap
The fund got hurt in the broad market downturn that began in
2007. It ranked in the bottom 5% of its peers in 2007, and bottom
33% and 39% the next two years.
Managers Richie Freeman, 59 years old, and Evan Bauman, 37,
discussed their investment approach from their offices in
How would you summarize your strategy?
This fund will have its 30th anniversary in October. And during
that time, we've been accumulators of innovative businesses,
unlike many others who are serial flippers of pieces of
Lots of guys say they are long-term investors. But they flip
their portfolios two, three, four times a year. We find stocks we
like and stick with many of them.
You've hadTyco (
) since 1983,Intel (
) since 1985 andComcast (
) since 1986. You boughtForest Labs (
) near the fund's inception in 1983. You've held many additional
names a decade or more. Why hold names such a long time?
We're not forecasters. Some stocks are disappointments. We get
some names through mergers and acquisitions. But one thing our
good stocks tend to have in common is that they're not afraid to
spend money today, looking ahead three to five years.
How would you elaborate on that, Evan?
Just to dovetail with what Richie said, we identify companies
with sustainable growth business models, companies that are
self-financing because of strong cash flow and free cash flow,
not companies that constantly need to refinance themselves.
Innovation is a core theme. We want companies that target big
addressable markets. We want companies that have big barriers to
entry or competitive advantages. We want self-sustaining organic
What role does valuation play in your stock-picking?
We like to identify stocks early on, before they become household
names. Then we like to hold them long enough for us to capture
and capitalize on earnings and cash flow growth.
We want both ends: We want to not only find them when they're
inefficiently priced, but also hold them long enough to let the
story play out. If we can use volatility to build a position,
that's a hallmark of our strategy.
You boughtCree (
) when it sold off, didn't you?
Great example. The company had sold off from over 100 to under 10
between 2000 and 2002. We bought it for the first time in the
summer of 2002. They make LEDs and related devices, which are
becoming widely known. But they weren't well known in 2002.
So they've grown, become vertically integrated. At first they
made backlighting for cell phones, then TVs. Now they make chips
and retail light bulbs. All the while, they've put money into
R&D. They've bought fixtures companies. Their technologies
have become the best in the industry in terms of cost of
manufacturing and brightness per watt in their devices.
They've done this with a combination of innovation and cash
flow, and no debt.
Even with all of this growth, they're still in the early
stages of a revolution in lighting.
Richie, you once told me you are a time arbitrager. Still
My (former) boss at Chemical Bank used to say that valuation is
everything. Valuation often is a matter of when you buy.
Evan, what's a current example of a buy influenced by timing?
If you want to characterize us, we're not only sustainable growth
investors but contrarians.
And an example?
Seagate (STX). In the last three or four years, what have
investors hated more than PCs? Their sales are declining. So
people ask us, how can you own a disk drive company?
The answer is that the field is now down to three companies,
so pricing is more rational.
There's no unit growth in computers. But storage is growing.
Earnings have gone from single-digit growth years ago to low
double digits over the past few years. They've bought back 200
million shares. Their dividend yield is over 4%.
You've gotSanDisk (SNDK) too.
They're the leading flash memory company based in the U.S.
We haven't owned device manufacturers, the smart phone makers.
But we own SanDisk because it benefits from the growth of data
and portability of media.
This is an example of what we mean by owning dominant
companies with large addressable markets. SanDisk makes storage
for tablets,Apple (AAPL) and others, smartphones.
What's drivingIsis Pharmaceuticals (ISIS) ?
We talked earlier about liking self-financing business models. A
lot of small and midcap biotechs are constantly refinancing in
the capital markets. Isis andImmunogen (IMGN) have both found a
way to raise money through partnerships with big pharmaceutical
companies. And they have platforms of technologies that treat a
variety of diseases.
Isis has more than 15 drugs in their pipeline. Immunogen has
more than 10. So with each you have multiple chances to bring new
drugs to market over time. That's important because most new
drugs in early stages (of research) do fail.
These companies continue to grow their pipelines without
having to tap the capital markets.
Isis had one new drug approved earlier this year. Immunogen
had one approved this year. These are the types of companies we
like. Lots of cash on their balance sheets because of
partnerships. Lots of shots on goal.
Speaking of shots on goal, why do you likeMadison Square Garden
(MSG), whose earnings per share growth has been up and down for a
couple of years?
Earnings were down because you had the National Basketball
Association (lockout of) the players' association.
It's a strong franchise with the (professional basketball)
Knicks, (professional hockey) Rangers and (it runs) Radio City
Music Hall. And the MSG Network is a jewel.
It's got strong cash flow. The Garden itself is undergoing a
renovation. And winning teams help.
Your stake inCBS (CBS) has held steady as the stock trends
higher. What do you like there?
There's enormous scarcity value to networks. They don't make them
any more. We like their outdoor advertising unit, which will be
spun off. It has ability to throw off cash flow, buy back stock
and pay a dividend. It comes down to cash generation.
Is ADT (ADT) a subscription-fee play, a company that pulls in
nicely visible monthly payments?
Within the last year, Tyco International broke into smaller parts
and spun off ADT.
The stock was in the 30s. There was activist shareholder
interest, which led to appreciable stock buyback. And the company
can throw off enormous free cash flow.
Few businesses are better than security. People tend not to
cut it, even in a recession. And ADT has the leading market share
in a fragmented industry.
Cohen &Steers (CNS) has been trending higher since November.
Is that because these managers target high-income clients who
might put more money to work amid a strengthening economy?
We bought this at the (2004) IPO at 13. Marty Cohen has done a
great job building an asset management company with over $40
billion. They are authorities on institutional investors in the
REIT space. They launched an income and energy opportunity MLP
Discovery Communication's (DISCK) earnings per share have slowed
for two quarters. What do you like?
This name came from our investment in Liberty Media, which spun
out Discovery (in 2005).
It has terrific ratings in the U.S. and internationally. It
throws off enormous cash flow.
Many people don't even know they are watching shows from
something called Discovery.
And we like companies related to John Malone (chairman of
Liberty Media). The value of programming assets in today's
environment cannot be overstated.
Amgen (AMGN) is on a run, helped by fast revenue growth for new
products Prolia and Xgeva. What else is driving it?
For a number of years this stock did little. It was trading
within about a 10-point range, the high 40s to the high 50s. It
was selling at 10 times earnings.
What changed was that the company announced a Dutch tender. It
would buy back 10% of their shares at a price that became 60.
The stock never looked back. It's now over 100. Earnings have
grown strongly, and that's in the face of the largest drug having
seen a lot of erosion. That's Epogen, their red-blood-cell
But throughout that, the company showed higher earnings.
They've got a strong pipeline. They made acquisitions. They're
forward thinking, not worried about the next quarter or two.
Advent Software (ADVS) has been on a run since November. EPS
growth has accelerated in three of the past four quarters. What's
They make record-keeping software. It's productivity enhancing.
They're used by many asset managers.
The business throws good cash flow. It's tied to a fee-based
business. They recently said they looked to see what they would
be worth to someone on the outside. They decided they could do
better on their own. For now.