CLEARBRIDGE SMALL CAP GROWTH PORTFOLIOS

Transcription

1 2Q 2018 Separately Managed Accounts Product Commentary CLEARBRIDGE SMALL CAP GROWTH PORTFOLIOS Jeffrey Russell, CFA, and Aram Green Portfolio Managers Small Cap Growth Portfolios Annualized returns net and gross of fees - PRELIMINARY (%) as of June 30, mo QTR YTD 1-yr 3-yr 5-yr 7-yr 10-yr Net of fees N/A "Pure" gross of fees Russell 2000 Growth Index N/A N/A The strategy returns are preliminary composite returns, subject to future revision (downward or upward). Please visit for the latest performance figures. YTD numbers are not annualized. Monthly, quarterly and YTD numbers are not annualized. Past performance is no guarantee of future results. Please see the GIPS endnotes for important additional information regarding the Portfolio performance and for effects of fees. Management and performance of individual accounts may vary for reasons that include the existence of different implementation practices and model requirements in different investment programs. Fees: Gross performance shown does not reflect the deduction of investment management fees and certain transaction costs, which will reduce Portfolio performance. Net performance includes the deduction of a 3.0% annual wrap fee, which is the maximum anticipated wrap fee for equity and balanced portfolios. Actual fees may vary. For fee schedules, contact your financial professional, or if you enter into an agreement directly with Legg Mason Private Portfolio Group, LLC (LMPPG), refer to LMPPG's Form ADV disclosure document. Returns reflect the reinvestment of dividends and other earnings. Investors cannot invest directly in an index, and unmanaged index returns do not reflect any fees, expenses or sales charges. Russell 2000 Growth Index measures the performance of the small-capitalization growth sector of the United States equity market. It is a subset of the Russell 2000 Index, which measures the performance of the small-capitalization sector of the U.S equity market. Key takeaways Performance was balanced across several sectors, most notably technology, industrials and health care. We repositioned the Portfolio s technology exposure to manage risk and bring our sector over more in line with the benchmark following the annual Russell index reconstitution. The IPO market provided a fertile environment to seed a number of new ideas. Market overview and outlook Small-cap stocks led broad gains for U.S. equity markets in the second quarter, rebounding from losses earlier in the year. The Russell 2000 Index surged 7.75%, while the S&P 500 Index advanced 3.43% and the Russell Midcap Index added 2.82%. The benchmark Russell 2000 Growth Index gained 7.23%, but in a more balanced market for small companies, it underperformed the Russell 2000 Value Index by 107 basis points. The tendency of smaller companies to have more domestically focused business models proved beneficial in a first half marked by rising trade tensions and a strengthening U.S. dollar headwinds for larger companies with more global revenue exposure. A sturdy U.S. economy, lower tax rates for small-cap companies which tend to be full U.S. taxpayers and a continued ample supply of capital have also been a boon INVESTMENT PRODUCTS: NOT FDIC INSURED NO BANK GUARANTEE MAY LOSE VALUE

2 to the asset class. First-quarter GDP grew at a better-thanexpected 2.0% rate, while unemployment touched a multidecade low of 3.8% in May before edging up to 4.0% in June. Industrial activity, as measured by manufacturing PMI, remained solidly in expansion territory. Companies with disruptive business models and secular growth tailwinds have thrived in this environment, contributing to a 9.70% year-to-date gain for the benchmark and outperformance for the Portfolio. The information technology (IT) sector is home to many of these innovative companies we favor, and it continued to be a leading driver of results during the second quarter. The long-term compounding of returns by some of our largest technology names, however, has caused our IT over to push the upper bounds of our internal risk guidelines. The June reconstitution of the Russell indexes, including the Russell 2000 Growth Index, provided motivation for us to significantly reposition our IT exposure and lower the Portfolio s average market capitalization to be more in line with the benchmark. IT was the sector most impacted by the reconstitution of the benchmark, with its ing falling from 24.9% to 19.1%. We reduced our IT exposure by a similar amount. Being mindful of valuations and position sizes, we trimmed back several large positions, including food delivery platform GrubHub, information security provider Fortinet, and manufacturing optimization software maker Aspen Technology, and we sold out of online real estate portal Zillow. Also notable about the reconstitution, biotechnology now represents 12% of the Russell 2000 Growth Index. The Portfolio has traditionally avoided owning early-stage biotech companies due to the binary nature of their business and limited visibility toward profitability. We will continue to participate in the success of the industry by owning companies that support biotech, including Medidata Solutions, a developer of cloud software for management of clinical data, and Syneos Health, a contract research organization that conducts clinical trials. Our fundamental research work, both in the public and private markets, enabled us to direct proceeds from the IT repositioning into several new ideas. Hudson, a post-ipo purchase, is well positioned in a highly concentrated market with limited competition due to the logistics and security requirements of operating in the secure environment of airports. from companies across the market, including Chegg, a provider of e-learning programs and digital textbook rentals for college students, Fox Factory, a maker of high-performance parts for bikes and off-road vehicles, and Trex, which manufacturers backyard decks made from recycled materials. Such diversification helped the strategy fare well in a quarter where consumer staples, energy and consumer discretionary sectors all portfolio unders were the leading performers in the benchmark. Portfolios highlights The ClearBridge Small Cap Growth Portfolios returned 11.75% (gross of fees) for the second quarter. In comparison, the benchmark Russell 2000 Growth Index returned 7.23% for the same period. Over the longer term, the Portfolios have outperformed the benchmark for the 1-, 3-, 5- and 7-year periods ended June 30, 2018 (gross of fees). On an absolute basis, the Portfolios had gains in eight of the nine sectors in which they were invested during the quarter (out of 11 sectors total). The largest contributors to performance were the IT and health care sectors. In relative terms, outperformance was driven by stock selection. Strong stock selection in the IT and industrials sectors contributed the most to relative performance. Stock selection in the financials, consumer discretionary and health care sectors also helped relative results. Conversely, stock selection in the consumer staples sector detracted from relative returns during the period. On an individual stock basis, the biggest contributors to absolute returns during the second quarter included Medidata Solutions, Fox Factory, Chegg, Fortinet and Syneos Health. The biggest detractors from absolute returns included positions in Casa Systems, Surgery Partners, Casey s General Stores, IDEX and Lion s Gate. During the second quarter, the Portfolios added three new positions and closed two positions. We established new positions in Hudson, in the consumer discretionary sector, Forward Air, in the industrials sector, and CarGurus, in the IT sector, and we sold positions in Zillow Group, in the IT sector, and MiMedx Group, in the health care sector. While IT and health care account for the majority of the Portfolio, we have been encouraged by the broad contribution 2

3 Top contributors 1 Contribution to equity return % Medidata Solutions, Inc Fox Factory Holding Corp Chegg, Inc Fortinet, Inc Syneos Health, Inc The leading individual contributors to performance for the quarter included: Medidata Solutions (MDSO), in the health care sector, provides cloud-based clinical data management and analytics tools for biopharmaceutical companies. Strong first quarter results in software subscription revenue were above internal plan and increased the likelihood of a guidance raise in the second quarter. Fox Factory (FOXF), in the consumer discretionary sector, is a manufacturer of suspension and performance systems for bikes and off-road vehicles. The stock responded to very strong end market demand for performance bikes and powered vehicles. Chegg (CHGG), in the consumer discretionary sector, is an online provider of textbooks and related e-learning services for college students. Shares have risen steadily this year, paced by strong services revenue and subscription growth that enabled the company to again beat earnings forecasts and raise guidance for the full year. Bottom contributors 2 Contribution to equity return % Casa Systems, Inc Surgery Partners, Inc Casey's General Stores, Inc IDEX Corporation Lions Gate Entertainment Corp The leading detractors from performance for the quarter included: Casa Systems (CASA), in the IT sector, is a provider of broadband solutions for mobile, cable and telecom service providers. An uneven pace of orders weighed on the shares of the newly public company. Surgery Partners (SGRY), in the health care sector, is a health care services company that manages surgical facilities, physician-partnered hospitals and diagnostic labs, as well as offering anesthesia, pharmacy and optical services. Continued tepid health care utilization trends have weighed on the stock. Casey s General Stores (CASY), in the consumer staples sector, operates convenience stores with gasoline service stations in the Midwest. Sluggish same-store sales growth in prepared foods has weighed on the stock. 1 Portfolio characteristics are based on a model portfolio, not an actual client account. The model portfolio is a hypothetical portfolio whereby the portfolio characteristics are based on simulated trading and account activity of a client account invested in this strategy. The model portfolio assumes no withdrawals, contributions or client-imposed restrictions. Portfolio characteristics of individual client accounts may differ from those of the model portfolio as a result of account size, client-imposed restrictions, the timing of client investments, market conditions, contributions, withdrawals and other factors. Please see Endnotes for additional information. This information does not constitute, and should not be construed as, investment advice or recommendations with respect to the sectors and securities listed, and it should not be used as the sole basis for any investment decision. Past performance is no guarantee of future results. 2 Portfolio characteristics are based on a model portfolio, not an actual client account. The model portfolio is a hypothetical portfolio whereby the portfolio characteristics are based on simulated trading and account activity of a client account invested in this strategy. The model portfolio assumes no withdrawals, contributions or client-imposed restrictions. Portfolio characteristics of individual client accounts may differ from those of the model portfolio as a result of account size, client-imposed restrictions, the timing of client investments, market conditions, contributions, withdrawals and other factors. Please see Endnotes for additional information. This information does not constitute, and should not be construed as, investment advice or recommendations with respect to the sectors and securities listed, and it should not be used as the sole basis for any investment decision. Past performance is no guarantee of future results. 3

4 Market capitalization 3 Market cap breakdown ($) Portfolio Benchmark Above 50 billion billion billion billion billion Weighted average market cap ($bil) Top 10 equity holdings 3 Percent of equity Trex Co Inc 3.23 Medidata Solutions Inc 3.02 ICON PLC 2.83 GrubHub Inc 2.68 athenahealth Inc 2.47 Fortinet Inc 2.39 Qualys Inc 2.36 Insulet Corp 2.31 Integra LifeSciences Holdings Corp 2.31 Copart Inc 2.23 Total number of holdings 69 Sector highlights 3 Average sector ings and performance (%) Gross of fees from 03/31/18 to 06/30/18 Sector Port. Port. return Benchmark* Benchmark* return Weight diff. Active contrib. Information Technology Health Care Industrials Consumer Discretionary Financials Consumer Staples Energy Materials Real Estate Telecomm Service Utilities Cash *Benchmark: Russell 2000 Growth Index. 3 Portfolio characteristics are based on a model portfolio, not an actual client account. The model portfolio is a hypothetical portfolio whereby the portfolio characteristics are based on simulated trading and account activity of a client account invested in this strategy. The model portfolio assumes no withdrawals, contributions or client-imposed restrictions. Portfolio characteristics of individual client accounts may differ from those of the model portfolio as a result of account size, client-imposed restrictions, the timing of client investments, market conditions, contributions, withdrawals and other factors. Please see Endnotes for additional information. This information does not constitute, and should not be construed as, investment advice or recommendations with respect to the sectors and securities listed, and it should not be used as the sole basis for any investment decision. Past performance is no guarantee of future results. 4

5 Important information Any information, statement or opinion set forth herein is general in nature, is not directed to or based on the financial situation or needs of any particular investor, and does not constitute, and should not be construed as, investment advice, a forecast of future events, a guarantee of future results, or a recommendation with respect to any particular security or investment strategy or type of retirement account. Investors seeking financial advice regarding the appropriateness of investing in any securities or investment strategies should consult their financial professional. Please refer to for more information about the Portfolio, including objective, risks and investment process. The information presented does not constitute and should not be construed as investment advice with respect to any investment discussed. There is no guarantee that investment objectives will be met. An investor cannot invest directly in an index. Investments are not FDIC insured or guaranteed by any government agency. Values may fluctuate due to market conditions and other factors. Past performance is no guarantee of future results. and other financial standards. These risks are magnified in emerging markets. Diversification does not assure a profit or protect against market loss. Definitions and additional information An investor cannot invest directly in an index, and unmanaged index returns do not reflect any fees, expenses or sales charge. A basis point (bp, or bps) is equal to 1/100th of 1%, or 0.01%. Gross domestic product (GDP) is the market value of all final goods and services produced within a country in a given period of time. An initial public offering (IPO) is the first time that the stock of a private company is offered to the public. The Institute for Supply Management's composite PMI Index (formerly the National Association of Purchasing Managers Index) is based on a survey of purchasing executives who buy the raw materials for manufacturing at more than 350 companies. Russell 2000 Index is composed of the 2,000 smallest companies in the Russell 3000 Index. Russell 2000 Growth Index is an unmanaged index of those companies in the small-cap Russell 2000 Index chosen for their growth orientation. Russell 2000 Value Index is an unmanaged index of those companies in the small-cap Russell 2000 Index chosen for their value orientation. Russell Midcap Index is a complete subset of both the Russell 1000 and the Russell S&P 500 Index is an unmanaged index of stocks that is generally representative of the performance of larger companies in the U.S. Separately managed accounts (SMAs) are investment services provided by Legg Mason Private Portfolio Group, LLC (LMPPG), a federally registered investment advisor. Client portfolios are managed based on investment instructions or advice provided by one or both of the following Legg Masonaffiliated subadvisors: ClearBridge Investments, LLC and Western Asset Management Company. Management is implemented by LMPPG, the designated subadvisor or, in the case of certain programs, the program sponsor or its designee. Risks All investments involve risk, including loss of principal, and there is no guarantee that investment objectives will be met. Substantial investments may be made in speculative and/or small-cap and mid-cap companies, which involve a higher degree of risk and volatility than investments in larger, more established companies. In addition, because the investments may be concentrated in a limited number of industries and companies, the Portfolios may involve heightened risk. The investment process may change over time. While most investments are in U.S. companies, investments may also be made in ADRs and other securities of non-u.s. companies in developed and emerging markets, which involve risks in addition to those ordinarily associated with investing in domestic securities, including the potentially negative effects of currency fluctuation, political and economic developments, foreign taxation, and differences in auditing 5

6 ClearBridge Small Cap Growth SMA GIPS endnotes ($USD) Ending December 31 Inception date: November 2008; Composite creation date: November 2008 Period Total return (net) Total return (*pure gross) Russell 2000 Growth Index return Number of portfolios % of bundled fee portfolios in Composite the composite dispersion Composite 3 Yr. Standard Deviation Benchmark 3 Yr. Standard Deviation Total composite assets at end of period (USD million) % of firm assets Total firm assets at end of period (USD million) % 23.54% 22.17% % 14.67% 14.80% % 119, % 6.67% 11.32% % 16.56% 16.91% % 100, % -3.28% -1.38% % 15.16% 15.16% % 92, % 5.28% 5.60% % 13.58% 14.02% % 100, % 48.30% 43.30% % 15.55% 17.52% % 85, % 17.95% 14.59% n/m 18.19% 21.01% % 54, % 2.60% -2.91% <5 100 n/m 19.83% 24.65% % 50, % 26.00% 29.09% <5 100 n/m n/a n/a % 55, % 40.64% 34.47% <5 100 n/m n/a n/a % 53,522.7 Nov - Dec % -6.77% -7.33% <5 100 n/m n/a n/a % 50,614.9 *Pure gross of fee returns do not reflect the deduction of any expenses, including transaction costs, and are presented as supplemental to the net of fee returns. n/m - Information is not statistically meaningful due to an insufficient number of portfolios in the composite for the entire year. COMPLIANCE STATEMENT: ClearBridge Investments, LLC claims compliance with the Global Investment Performance Standards (GIPS ) and has prepared and presented this report in compliance with the GIPS standards. ClearBridge Investments, LLC has been independently verified for the periods January 1, December 31, The verification reports are available upon request. Verification assesses whether (1) the firm has complied with all the composite construction requirements of the GIPS standards on a firm-wide basis and (2) the firm's policies and procedures are designed to calculate and present performance in compliance with the GIPS standards. Verification does not ensure the accuracy of any specific composite presentation. FIRM INFORMATION: ClearBridge Investments, LLC ("ClearBridge") is a wholly owned subsidiary of Legg Mason, Inc. ("Legg Mason"). The investment advisory business now known as ClearBridge was registered in September 2005 to facilitate Legg Mason's acquisition of substantially all the equity asset management businesses known as Citigroup Asset Management. These former businesses serve as the foundation of ClearBridge and its claim of GIPS compliance for institutional accounts through predecessor firms, effective as of January In June 2008, ClearBridge combined this business with its retail business to form a single GIPS firm. As of April 1, 2013 and January 1, 2016, ClearBridge's affiliates, Global Currents Investment Management, LLC, and ClearBridge, LLC, respectively, have become part of the ClearBridge GIPS firm. COMPOSITE INFORMATION: The ClearBridge Small Cap Growth SMA composite consists of discretionary wrap accounts with an account minimum of US $25,000. Accounts within the composite seek long-term capital growth by investing primarily in U.S. small capitalization growth stocks. The main risks of this strategy are General Investment Risk, Small Cap Risk, High Volatility Risk and Non-U.S. Investment Risk. Prior to June 2008, the minimum was $5,000. Non-fee-paying seed capital portfolios represented the following percentage of composite assets: 100% as of December 2008 and 2009; 36% as of December 2010 and 2011; 13% as of December INPUT AND CALCULATION DATA: The fee schedule currently in effect is 3.00% on all assets. Net of fee composite returns are calculated by reducing each monthly composite pure gross rate of return by the highest "bundled" fee charged (3.00%) annually, prorated to a monthly ratio. The "bundled" fee includes transaction costs, investment management, custodial, and other administrative fees. Effective January 1, 2013, the number of portfolios reflects a change from prior periods due to an aggregation of accounts as reported by one sponsor. As of January 2014, the internal dispersion of annual returns is measured by the asset-ed standard deviation of portfolio returns included in the composite for the entire year. For prior years, the equal-ed standard deviation was used. The composite employed a 10% significant cash flow policy which was discontinued in January A list of composite descriptions is available upon request. Policies for valuing portfolios, calculating performance, and preparing compliant presentations are available upon request. Past performance is not necessarily indicative of future results. BENCHMARK INFORMATION: The Russell 2000 Growth Index measures the performance of those Russell 2000 companies with higher price-to-book ratios and higher forecasted growth values Legg Mason Investor Services, LLC, member FINRA, SIPC. Legg Mason Investor Services, LLC and ClearBridge Investments are subsidiaries of Legg Mason, Inc AMXX D