A Different View of Growth

A Different View of Growth

Looking beyond the limits of traditional growth-stock benchmarks has allowed ClearBridge Portfolio Managers Margaret Vitrano and Evan Bauman to thrive in a crowded field.

What sets your approach apart from other growth managers?

Vitrano: We tend to explore a wider range of companies than you see in the major indexes, and that's because we think it’s important to have a broad definition of growth, one that goes beyond simple revenue growth.  It can be margin expansion.  It can be a cyclical recovery.   Our feeling is that if you take a broad view,  you can find diamonds in the rough that can end up being really nice performers over time.

Bauman:  We have been very, very consistent in our approach, viewing holdings and prospective holdings from the standpoint of  long-term business owners -- seeking to cultivate and harvest sustainable growth over the long term, accepting that may sometimes mean riding out short-term issues.  And as a result,  we are very selective about what we hold. We don’t jump in and out of positions.  We want to buy promising companies, not buy the market. We used to call that being “benchmark agnostic”; I think a better term now is “high active share”. As a result, there may be periods where we lag the market, but that’s the price you pay if you want to be in a position to do better than the market.  

What are some of the things you specifically look for?

Vitrano: We strive to buy good business models, good balance sheets and good management teams at a good price. In terms of business models, I’m talking about companies that generate high returns, companies that consistently generate a lot of cash flow and companies that have secular tailwinds behind them. That’s because when you are considering holding an investment for several years, it’s hard to predict the rate of revenue growth. But if a business can benefit from a secular tailwind -- like a growing middle class in emerging markets or like increasing adoption of the Internet across our lives -- that helps give us higher confidence in a company being able to achieve above-average growth several years out. In addition, we look for companies that have moats around their business that help ensure the sustainability of a company’s profits. In terms of good management teams, we have found that when management teams have a clearly defined strategy, the employees tend to have a clear understanding of what to do in keeping with those corporate priorities. Most large companies are well-capitalized post the financial crisis, but we do look for companies that are able to fund their own growth over time with free cash flow.

Bauman: In principle, we'll go anywhere. We worry less about sector over- and under-weights, about certain relative exposures, and more about finding well-positioned, well-run, long-term-growth businesses where managements are really well trained in capital allocation. it’s a quality-oriented, high-concentration, high-conviction approach, that pays attention to valuation and we’ll most probably spend more time speaking about valuation. Our focus has primarily been in health care, media, tech, and energy. But doesn't mean we can't find a stock in another sector.

Where do you see opportunity going forward?

Bauman: While the market is at or near all-time highs, several areas we target – health care, energy and media – remain generally uncrowded and undervalued. We believe this is due to money flow – investors abandoning entire industries in favor of what’s currently working, a force accentuated in the fourth quarter by tax-loss selling – as much as fundamentals. In energy, money flow has been very negative toward that space, and there was been some selling prior to the new tax law. Yet fundamentals are pretty good in general  In media, there is a fair amount of mispricing, and certainly some overvalued companies, but what we own is not in that category, and indeed we have seen some up meaningfully last year. As far as the tax law is concerned, health care as an industry is notable for the amount of money held abroad that could now be repatriated and which could fuel capex, dividends and buybacks. 

Vitrano: We believe GDP growth is likely to continue on its positive uptrend for the first half of the year and that consumer spending will be an important component. We are keeping a close eye on oil and gas prices and how they could impact the consumer in 2018. While more optimistic on the economy than a year ago, we remain cognizant of the risks faced by the Trump administration in pushing forward with its remaining fiscal agenda, as well as the extended valuations now present in parts of the large cap market. It's a background that argues for our diversified, opportunistic approach to owning quality growth companies.

 

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