As passive investing grows in popularity, itâs been difficult for mutual fund managers to justify a relatively costly active-management strategy.
The ClearBridge International Growth Fundâs excellent track record makes the case for carefully including active management in a diversified portfolio.
The $503 million ClearBridge International Growth Fund
Â is rated five stars by Morningstar (the financial-data firmâs highest rating), and has trounced its peer group of funds and its benchmark, the MSCI EAFE Index
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.
âWhen companies invest for growth, generally what you see is earnings can go sideways or down. The market doesnât like that,â she said. âGrowth 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.â
Hereâs 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 fundâs concentration in those countries was not by design, but came about âthrough stock picking.â
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, âabout 70%-plus are state-owned enterprises.â So she is most interested in companies such as Alibaba Group Holding
Â and Tencent Holdings
Â â the fund holds shares in all three â because they are âpart of the dynamismâ of non-state-owned companies in China.
Types of growth
Mazen said that identifying various types of growth companies âallows for participation in different market environments.â Here are three categories of growth she described, along with an example of each held by the fund.
These are companies Mazen calls âdisrupters,â which can be of any size. âAlibaba is actually an emerging growth stock,â 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.
is an online retailer that has âan interesting heritage with social media,â 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. Â
â[T]hey are very far ahead of their peers,â Mazen said, and with investments in new markets and distribution capabilities, she believes the company âcan grow for a very long time.â
The largest portion of the fund (40% to 60%) is made up of companies that have established business models and are what Mazen calls âsustainable long-term compounders with consistent returns.â
Â a U.K.-based provider of commercial and residential pest-control services that operates internationally, was the fundâs second-largest holding as of June 30, reflecting very strong performance for the stock.
Mazen said Rentokilâs industry is becoming increasingly important because of global warming, bed bug infestations in recent years and because of the growth potential in emerging markets, including India, where Rentokil made a recent acquisition.
The company is growing at âa nice, steady rate,â she said, and it has been âmaking small acquisitions and putting them on their platform.â
Mazen called Rentokil âa long-term secular compounder.â
These are companies âwhere we see an evolving story that the market doesnât yet recognize as being a growth stock,â Mazen said. Those stocks have attractive valuations and âtend to be really outsized performers.â They make up 20% to 40% of the fund.
Â was the largest holding of the ClearBridge International Growth Fund as of June 30, but Mazen was quick to say this wasnât by design but âbecause it grew there.â The company makes cosmetics and last year completed a restructuring led by new CEO Masahiko Uotani, who pushed hard to bring the companyâs expenses under control.
Mazen likes the cosmetics industry, which she said has a steady 5% growth rate.
But Shiseido still trades at valuations well below those of LâOreal SA
Â and Estee Lauder
because of lower profit margins, Mazen said, presenting an opportunity to buy the shares in anticipation of growth.
âWe think the driver for performance will ultimately be earnings,â Mazen said, because Shiseidoâs profitability âis less than half their peers.â
âThere is no reason it cannot catch up to those levels. The market does not believe that can happen. We do,â she said.
Performance and top holdings
This table shows the excellent performance of the ClearBridge International Growth Fundâs Class A and Class I shares against Morningstarâs Foreign Large Growth category, the benchmark MSCI EAFE Index and the MSCI All Country Ex-U.S. Index:
|Total return – 2017 through July 31||Average annual return – 3 years||Average return – 5 years||Average return – 10 years|
|ClearBridge International Growth Fund – class A
|ClearBridge International Growth Fund – class I
|Morningstar Foreign Large Growth category||1.2%||6.9%||7.0%||4.6%|
|MSCI EAFE Index (U.S. dollars)||0.0%||5.5%||6.4%||3.9%|
|MSCI All Country U.S. Index (U.S., dollars)||-1.1%||6.5%||6.1%||3.6%|
|Sources: Morningstar, FactSet|
The class A returns exclude any sales charges (which are often waived, depending on how shares are purchased) and are net of annual expenses that are currently 1.15% of assets. The current expense ratio for class I shares is 0.90%.
Here are the top 10 equity holdings (of 58) of the ClearBridge International Growth Fund as of June 30:
|Company||Ticker||ADR||Country||Industry||Share of fund||Total return – 2018 through July 31|
|Shiseido Co. Ltd.||
|Rentokil Initial PLC||
|United Kingdom||Miscellaneous Commercial Services||3.5%||8%|
|ASML Holding NV||
|Netherlands||Electronic Production Equipment||3.4%||28%|
|London Stock Exchange Group PLC||
|United Kingdom||Investment Banks/Brokers||3.1%||17%|
|Diageo PLC ADR||
|United Kingdom||Beverages: Alcoholic||2.8%||2%|
|Suncor Energy Inc.||
|Sources: Morningstar, FactSet|
The fund tends to purchase shares traded in local markets. However, shares of Icon PLC
Â and Suncor Energy
Â are publicly listed in the U.S., and the fund holds American depositary receipts (ADR) of Diageo PLC
If there are ADRs available for stocks the fund purchases outside the U.S., the ADRs are listed in the table.
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