By Philip van Doorn, MarketWatch
Bloomberg, Getty Images
As passive investing grows in popularity, it’s been difficult for mutual fund managers to justify a relatively costly active-management strategy.
The ClearBridge International Growth Fund’s excellent track record makes the case for carefully including active management in a diversified portfolio.
The $503 million ClearBridge International Growth Fund /zigman2/quotes/202194468/realtime LGGAX +0.02% /zigman2/quotes/205542719/realtime LMGNX +0.04% is rated five stars by Morningstar (the financial-data firm’s highest rating), and has trounced its peer group of funds and its benchmark, the MSCI EAFE Index XX:990300 +0.31% , this year and over the long term, as you can see below.
In an interview on Aug. 1, Elisa Mazen, the head of head of global and international growth at ClearBridge Investments (a subsidiary of Legg Mason Global Asset Management), explained that she and her colleagues managing the fund look to beat the index by identifying stocks of growth companies that are underappreciated by other investors.
Mazen and her team have been running the ClearBridge International Growth Fund since September 2013.
Legg Mason Global Asset Management
“When companies invest for growth, generally what you see is earnings can go sideways or down. The market doesn’t like that,” she said. “Growth can be volatile. We adjust for that by having a valuation focus. We buy good companies at moments when we think the market is missing the bigger picture.”
Here’s a look at the top 10 countries represented in the ClearBridge International Growth Fund and how those concentrations compare to those of the benchmark index:
Both the fund and the index are heavily weighted toward Japan and the United Kingdom, but Mazen said the fund’s concentration in those countries was not by design, but came about “through stock picking.”
One way the fund is differentiated form the MSCI EAFE Index is that its managers can move up to 10% of the portfolio into emerging-market stocks. The fund sticks with that limit because of higher volatility for stock in emerging markets.
Mazen pointed out that among publicly traded companies in China, “about 70%-plus are state-owned enterprises.” So she is most interested in companies such as Alibaba Group Holding /zigman2/quotes/201948298/composite BABA -0.15% , Baidu /zigman2/quotes/209050136/composite BIDU -0.58% and Tencent Holdings /zigman2/quotes/204605823/delayed HK:700 +0.36% /zigman2/quotes/207908563/delayed TCEHY +0.41% — the fund holds shares in all three — because they are “part of the dynamism” of non-state-owned companies in China.
Types of growth
Mazen said that identifying various types of growth companies “allows for participation in different market environments.” Here are three categories of growth she described, along with an example of each held by the fund.
These are companies Mazen calls “disrupters,” which can be of any size. “Alibaba is actually an emerging growth stock,” she said. Those stocks tend to have high valuations and price volatility, so the fund limits them to 20% of the portfolio. The fund also limits the size of individual investment positions to control risk, Mazen said.
Asos PLC /zigman2/quotes/209092221/delayed UK:ASC +4.81% /zigman2/quotes/204466627/delayed ASOMY +4.39% is an online retailer that has “an interesting heritage with social media,” Mazen said. Through its website, the company helps people (mainly millennials) select clothing (and other items more recently, including cosmetics) by offering its own products and those manufactured by other companies.