18th April 2016
US politics has gone from the ridiculous to the absurd
“US politics has gone from the ridiculous to the absurd but I'm actually quite bullish on the market,” said Evan Bauman, co-manager of the Elite Rated Legg Mason ClearBridge US Aggressive Growth fund, at a breakfast meeting attended by FundCalibre's Ryan Lightfoot-Brown.
Conviction in ideas
“We haven't been this 'non-consensus' since the tech bubble burst in 1999/2000. We had a really good period of outperformance after that.
“Our top ten stocks usually account for around 50% of the portfolio – we really like to show our conviction in our favourite companies. At the moment, we have a lot in healthcare and energy companies. Valuations in both areas are good and there is strong potential for consolidation.
“$30 oil doesn't work for anyone, but both OPEC and non-OPEC producers are playing chicken about making production cuts. I think this will create issues in the future. For example, there is a high probability that, if the price of oil doesn't rise soon, in the next three to 12 months a number of companies could go insolvent, leading to mass consolidations and an eventual reduction in the supply of the commodity. That, in turn, could lead to a big spike in the oil price further down the line.
“I also believe we could see a surge in merger and acquisition in the healthcare sector in the second half of the year. Pfizer, for example, wants to be a growth company again but can't because of its current structure, so will either buy or get bought.
“We don't own any consumer staples companies as they are expensive and we don't have a positive outlook for the sector. We don't currently own core tech stocks either – particularly the FANGs (the name given to Facebook, Amazon, Netflicks and Google). We prefer to invest in their media content companies or suppliers.”
Early-stage company investment opportunities
In a similar vein to Neil Woodford, manager of Elite Rated Woodford Equity Income, the managers of Legg Mason IF Clearbridge US Aggressive Growth are also finding good investment opportunities in early-stage companies.
“Whilst we show conviction in our biggest holdings, we also have a long tail – a large number of very small positions in a lot of other companies. These tend to be 'early-stage' businesses – those right at the start of their life,” said Bauman.
“For example, small cap biotech firms just can't get funding at the moment, which is the model they are built on. This is driving negativity in the sector. I'm getting around this by buying firms that are setting up joint ventures with big pharmaceuticals, who are adding credibility to a project, thus increasing funding likelihood.”
Past performance is not a reliable guide to future returns. You may not get back the amount originally invested, and tax rules can change over time. The managers' views are their own and do not constitute financial advice.
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