1Q 2017
Product Commentary
CLEARBRIDGE
VALUE TRUST
Sam Peters, CFA, and Jean Yu, CFA
Portfolio Managers
Key takeaways
Average annual total returns and fund expenses (%)
as of March 31, 2017
1-yr
5-yr
Since
Incept.
10-yr (04/16/82) Gross
Net
Class C
3-mo
Excluding sales
charges
4.37
18.00 11.76
2.01
11.67
1.77
1.77
Including effects
of maximum
sales charges
3.42
17.05 11.76
2.01
11.67
-
-
S&P 500 Index
6.07
17.17 13.30
7.51
N/A
-
-
Performance shown represents past performance and is no guarantee of future
results. Current performance may be higher or lower than the performance shown.
Investment return and principal value will fluctuate, so shares, when redeemed, may be
worth more or less than the original cost. Class C shares have a one-year contingent
deferred sales charge (CDSC) of 0.95%. If sales charges were included, performance
shown would be lower. Total returns assume the reinvestment of all distributions at net
asset value and the deduction of all Fund expenses. Total return figures are based on the
NAV per share applied to shareholder subscriptions and redemptions, which may differ
from the NAV per share disclosed in Fund shareholder reports. Performance would have
been lower if fees had not been waived and/or reimbursed in various periods. Returns for
less than one year are cumulative. Performance for other share classes will vary. For the
most recent month-end information, please visit www.leggmason.com
Gross expenses are the Fund's total annual operating expenses for the share class(es)
shown.
Net expenses are the Fund's total annual operating expenses for the share classes
indicated and would reflect contractual fee waivers and/or reimbursements, where these
reductions reduce the Fund's gross expenses. These arrangements cannot be terminated
prior to December 31, 2018 without the Board’s consent. In periods of market volatility,
assets may decline significantly, causing total annual Fund operating expenses to become
higher than the numbers shown in the table above.
S&P 500 Index is a market capitalization-weighted index of 500 widely held common
stocks. Investors cannot invest directly in an index, and unmanaged index returns do not
reflect any fees, expenses or sales charges.
INVESTMENT PRODUCTS: NOT FDIC INSURED • NO BANK GUARANTEE • MAY LOSE VALUE
•
During every deflationary scare this cycle, credit
issuance has occasionally slowed down, but it has
always come raging back to higher levels.
•
We still believe that cycles begin with fear and end
with the exuberance of greed.
•
Given the recent spike in consumer confidence and a
very elongated cycle, we are aware of the late-cycle
risks and are continually dialing back on risks as
valuation opportunities dictate.
Market overview
Major U.S. equity indices continued their record-breaking run
in the first quarter, as the S&P 500 Index gained 6.1% during
the period. Investors drove stock prices higher across most
sectors on continued optimism that the Trump administration
and a Republican Congress would improve economic growth
through tax reform, regulatory relief and infrastructure
spending. This enthusiasm may have eased somewhat in
March, however, following the failed attempt by Congress at
repealing and replacing the Affordable Care Act (ACA), which
revealed fissures within the GOP that could make certain
legislation more difficult to achieve. Regardless, economic
news remains largely encouraging. In March the Commerce
Department revised upward its measurement of fourth-quarter
annualized GDP growth from 1.9% to 2.1%, which was led by
stronger-than-expected consumer spending and improving
private inventory investment. Individual spending continues
to drive the U.S. economy, as job growth remains strong,
Fund highlights
wages continue to increase, and consumer confidence hovers
near current decade highs.
During the first quarter of 2017, the ClearBridge Value Trust –
Class C shares generated a total return, excluding sales charges,
of 4.37%. In comparison, the Fund’s unmanaged benchmark,
the S&P 500 Index, returned 6.07% and the Lipper Multi-Cap
Core Funds category average was 5.46% for the same period.
Ongoing strength in the economy, as well as inflation nearing
the Federal Reserve’s 2% target, drove the central bank to raise
interest rates in March, for the second time since December
2015. Market participants are largely convinced that the Fed
will slowly and steadily increase rates for the foreseeable
future, with two more rate hikes in 2017 being the most likely
scenario. Despite higher interest rates on the horizon, the U.S.
10-year Treasury yield finished the quarter at 2.39%,
approximately where it started. On the commodities front, oil
prices fell slightly during the quarter, as U.S. shale suppliers
have ramped up production and as OPEC debates extending its
recently agreed-to production cuts.
Using a three-factor performance attribution model, 1 relative
portfolio underperformance was driven by overall stock
selection, sector allocation and the interaction of sector
allocation. Stock selection in the information technology (IT)
and health care sectors detracted the most from relative
returns. An underweight to IT also detracted somewhat from
relative performance for the quarter. Meanwhile, security
selection in the consumer discretionary sector contributed to
relative returns, as did an underweight allocation to the
telecommunication services sector (no positions).
The S&P 500 Index closed up 6.1%, while the Dow Jones
Industrial Average gained 5.2%. Small-cap stocks
underperformed large-caps during the quarter, with the Russell
2000 returning 2.5% versus 6.0% for the Russell 1000. Looking
at investment style, growth-oriented stocks outperformed their
value counterparts, as the Russell 1000 Value Index returned
3.3% to the Russell 1000 Growth’s 8.9% during the first
quarter.
Oracle, Amazon.com, Allergan, PulteGroup and Realogy
Holdings were the largest contributors to performance, while
the biggest detractors included Apache, Bristol-Myers Squibb,
Qualcomm, Synchrony Financial and Ralph Lauren.
During the first quarter we initiated six new positions: Coty,
Hanesbrands, Cabot Oil & Gas, International Exchange, Royal
Gold and Signet Jewelers. Four positions were eliminated:
Mosaic, KKR, LyondellBasell and Discover Financial Services.
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A three-factor attribution consists of the allocation effect, the selection effect and the
interaction effect, which sum to the portfolio's performance relative to the benchmark.
Allocation refers to excess performance attributable to the manager’s decision to
overweight and underweight certain sectors relative to the market. Selection represents
the portion of performance attributable to the manager’s stock-picking skills. Interaction,
as the name suggests, represents the interaction between weighting and selection
effects, and does not represent an explicit decision of the manager.
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Top contributors
Shares of Oracle, which provides products and services for the
corporate IT ecosystem, jumped in the first quarter on
optimism that the company’s cloud transition could be
successful. While it is still early in Oracle’s cloud transition,
the company has shifted business to the cloud at a similar rate
to Microsoft at a similar point in its transition cycle, and at a
faster rate than Adobe, which is perhaps the most successful
example of a software provider transitioning to cloud delivery.
While Oracle’s cloud business is still small relative to its legacy
business, the cloud business is large enough and growing fast
enough to positively impact earnings. We are positive on the
company’s transition and products, and anticipate faster
adoption of its cloud delivery platform in the near future.
We added materially to health care in the fourth quarter of
2016, as the sector has been trading at a discount to the
broader market. Allergan was one health care name we added
to, as the company was sold down on what we believed to be
transitory sector-level concerns about drug pricing, and as the
company transitioned from older products to a new product
sales cycle. That said, Allergan was a top-performing stock in
the first quarter of 2017. The company reported a strong
quarter for earnings, and investors appear to be positive on its
recent acquisition of LifeCell, which makes regenerative tissue
products, and its announced acquisition of Zeltiq, a body
contouring business that is highly synergistic to Allergan’s
leadership in the aesthetics market. Furthermore, Allergan’s
underappreciated and growing long-duration business (which
includes medical aesthetics and Botox) is a gem that
collectively accounts for about 40% of total earnings and is
either cash-pay or based outside of the U.S. With stability in its
commercialized business and cash flow and earnings goals
now within reach, it will be up to Allergan’s drug pipeline to
deliver stronger growth over the long term. We remain
confident in the company’s pipeline and base business, and its
highly capable CEO, Brent Saunders.
Leading homebuilding company PulteGroup was a topperforming stock in the first quarter on a combination of
factors affecting the industry, including broader enthusiasm
about the economy, resilient housing data and flat-to-declining
Treasury yields. The latter factor may help mortgage rates
stabilize, which could buoy new home sales. In addition, pentup demand for housing continues to be a theme, as more
millenials enter the workforce and save up for a home. With
housing investment across the board still at relatively low
levels, the potential tailwinds for PulteGroup are strong, and
the company has been a better allocator of capital than its
competitors.
Top detractors
Apache shares were a leading detractor in the first quarter, as
the price of oil slid somewhat during the period and the
company reported weaker-than-expected fourth-quarter
earnings results. The market may also be concerned about the
oil-gas mix from Apache’s Alpine High field. Apache has
begun drilling deeper in the region first to prove out the field,
but deeper regions tend to have a higher gas mix, which the
market dislikes. Shallower shale regions usually feature more
oil. It’s still early, but management believes there should be a
decent window for oil in the shallow portions of the Alpine
High, but won’t know more until later this year. Regardless,
these low expectations are already embedded in the stock, and
we believe that a higher gas mix isn’t necessarily bad, while
the potential for more oil in shallower regions could be a
positive upside for the stock.
Qualcomm shares declined in the first quarter following
reported mixed results from the prior quarter and as the
market became worried about the possibility of Apple
suspending its royalty payments to Qualcomm, given an
ongoing court case regarding the terms of a licensing
agreement between the two companies. Apple represents a
significant, but not immense, chunk of business for
Qualcomm. The company should be able to manage the loss of
Apple’s payments in the short term, but a larger concern might
be whether regulatory and legal issues begin to threaten
Qualcomm’s licensing business model, which accounts for twothirds of its earnings. However, we believe that the likelihood
of such a scenario is quite low and will take several years to
ultimately play out. Qualcomm’s stock price already discounts
some form of this worst-case scenario occurring. And at
current low valuations, with an approximately 4% dividend
yield, we believe there is room for upside potential,
particularly if the company’s announced acquisition of NXP
Semiconductors is approved by regulatory authorities.
A post-election rise in interest rates, combined with optimism
about tax reform and regulatory relief, benefited financial
sector stocks during the fourth quarter, in particular our
holding Synchrony Financial. However, as enthusiasm for the
inflation trade has faded, Synchrony, along with other
financial sector stocks, declined somewhat during the first
quarter. Synchrony may also have been negatively impacted
by the market’s declining expectations of tax reform being
implemented this year, as the company would be a major
beneficiary of corporate tax cuts and reform. Furthermore, tax
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returns being delivered later this year, and thus borrowers
having to delay payments, could impact the first-quarter
bottom line. But that issue is transitory, and we still remain
positive on the stock. We believe Synchrony’s share price is
still well below business value. Additionally, Synchrony has
ample excess capital that should allow them to pay out 100%
or more of earnings to shareholders for years and grow at a
substantial premium to the industry, according to our analysis.
Synchrony is currently our highest-conviction name in the
financials sector.
Outlook
Just as great physical rivers ultimately erode their channels
and cause major flooding damage, every market cycle’s
dominant structure inevitably erodes as the flood of easy
capital and greed give rise to excessive valuations and poor
investments that collapse under missed expectations. During
these often violent shifts, the cycle’s biggest winners become
losers, allowing new winners to emerge. Given the dynamics of
the current cycle, the deepest pockets of long-term value will
likely be those select companies that did not enjoy cheap
capital from excess credit on the debt side, and material
passive index participation on the equity side. These value
orphans have been and are, in fact, a growing part of our
portfolio, as careers will be made by owning them and
avoiding the excesses from too much cheap capital. The
challenge is one of timing. Although expectations and
valuation are our major focus as key determinants of long-term
returns, valuation is a poor timing device, especially when
investors are increasingly choosing to surf down a raging river
of capital that is still gathering momentum.
from higher confidence and some form of inflation. This is
very hard for most people to imagine, including us, as the
current market’s collective subjective probabilities have ZERO
direct experience with true inflationary risks and higher rates.
The byproduct of a 35-year bull market in bonds is likely a lack
of imagination in what should scare us, which is the definition
of tail risk. Investors always struggle to distinguish real and
perceived risks, but confidence appears to play a causal role in
translating risks into realized returns, making the majority of
investors look bad in the process.
Given the recent spike in consumer confidence and a very
elongated cycle, we are aware of the late-cycle risks and are
continually dialing back on risks as valuation opportunities
dictate. However, we have yet to see higher consumer
confidence translate into materially higher economic growth,
and a persistent shift in investor flows toward equities. We
also see few signs of an imminent recession or economic
boom, for that matter, and our subjective probability is still
around 20% for a U.S. recession in the next 12 months. What
does interest us, is that since Brexit we have expected and
observed a major shift toward populism as the key driver of
policy. We think populism demands an inflationary policy
response, and that the monumental dysfunction of D.C.
politics will still deliver on what the people want: wage
inflation and higher deficits. An inflationary cure, if it
materializes, may eventually prove more painful than the
manageable deflationary malaise, especially for markets that
have been conditioned by high realized real returns and low
volatility from bonds. Ultimately, the credit river can only be
threatened by unexpected losses, and we think the
generational shift toward populism could deliver.
To address the timing question, an investor has to make a call
on what could kill the bull market in credit and its underlying
driver: the insatiable hunt for yield. Given that people set
subjective probabilities by what they have experienced,
especially those recent events that stick out, most investors
would frame cycle-ending risk as some form of deflation. The
problem with this framing is that deflation drives yields lower,
which reinforces the need for yield, further supporting credit:
rinse-wash-repeat. During every deflationary scare this cycle,
credit issuance has occasionally slowed down, but it has always
come raging back to higher levels as more capital ended up
chasing ever lower yields.
From a broader perspective, we still believe that cycles begin
with fear and end with the exuberance of greed. By most
measures, the fear-to-greed arc is especially elongated this cycle
because of the lack of confidence. Accordingly, we still believe
the real tail risk from a termination of this cycle will come
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Top 10 equity holdings (%)
Alphabet Inc
4.2
Wells Fargo & Co
3.7
Microsoft Corp
3.6
Oracle Corp
3.5
Citigroup Inc
3.5
Synchrony Financial
3.3
Allergan PLC
3.2
Amazon.com Inc
3.0
Realogy Holdings Corp
2.9
Cisco Systems Inc
2.7
Sector allocation (%)
Financials
18.5
Information Technology
16.8
Health Care
15.4
Consumer Discretionary
15.0
Industrials
11.7
Utilities
6.4
Energy
5.7
Real Estate
4.7
Consumer Staples
2.6
Materials
1.5
Telecommunication Services
0.0
Cash/Other
1.6
Percentages are based on total portfolio as of quarter end and are subject to change at
any time. For informational purposes only and not to be considered a recommendation to
purchase or sell any security.
Definitions and additional terms:
Please note that an investor cannot invest directly in an index, and unmanaged index
returns do not reflect any fees, expenses or sales charges.
Category average returns’ Source: Lipper Inc. Past performance is no guarantee of
future results. Lipper returns are based on the three-month period ended March 31,
2017, and they are calculated among 790 funds in the Lipper Multi Cap Core peer group,
including reinvestment of dividends and capital gains, if any, and excluding sales charges.
The Affordable Care Act (ACA) is a federal statute signed into law in March 2010 as a
part of the health care reform agenda of the Obama administration.
Brexit is an abbreviation of "British exit," which refers to the June 23, 2016 referendum
by British voters to exit the European Union.
Dow Jones Industrial Average (DJIA) is an unmanaged index composed of 30 bluechip stocks, each with annual sales exceeding $7 billion. The DJIA is price-weighted,
reflects large-cap companies representative of U.S. industry, and historically has moved in
tandem with other major market indexes, such as the S&P 500.
Federal Reserve Board ("Fed") is responsible for the formulation of policies designed
to promote economic growth, full employment, stable prices, and a sustainable pattern of
international trade and payments.
Gross Domestic Product (GDP) is an economic statistic that measures the market
value of all final goods and services produced within a country in a given period of time.
Organization of Petroleum Exporting Countries (OPEC) is an organization consisting
of the world's major oil-exporting nations.
S&P 500 Index is an unmanaged index of 500 stocks that is generally representative of
the performance of larger companies in the U.S.
Treasury yield is the return on investment, expressed as a percentage, on the U.S.
government's debt obligations (bonds, notes and bills).
U.S. Treasuries are backed by the “full faith and credit” of the United States
government and offer return of principal value if held to maturity. The U.S. government
guarantees the principal and interest payments on U.S. Treasuries when the securities are
held to maturity.
Russell 1000 Index measures the performance of the 1,000 largest companies in the
Russell 3000 Index, which represents approximately 92% of the total market
capitalization of the Russell 3000 Index.
Russell 1000 Growth Index is an unmanaged index of those companies in the large-cap
Russell 1000 Index chosen for their growth orientation.
Russell 1000 Value Index is an unmanaged index of those companies in the large-cap
Russell 1000 Index chosen for their value orientation.
Russell 2000 Index is composed of the 2,000 smallest companies in the Russell 3000
Index.
A three-factor attribution consists of the allocation effect, the selection effect and the
interaction effect, which sum to the portfolio's performance relative to the benchmark.
Allocation refers to excess performance attributable to the manager’s decision to
overweight and underweight certain sectors relative to the market. Selection represents
the portion of performance attributable to the manager’s stock-picking skills. Interaction,
as the name suggests, represents the interaction between weighting and selection
effects, and does not represent an explicit decision of the manager.
5
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Clarion Partners
ClearBridge Investments
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Martin Currie
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Western Asset
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@leggmason
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reach their financial goals through long-term, actively managed investment strategies.
• A broad mix of
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alternatives and
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invested worldwide
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each with its own
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and analysis
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What should I know before investing?
Equity securities are subject to price fluctuation and possible loss of principal.
International investments are subject to special risks, including currency fluctuations
and social, economic and political uncertainties, which could increase volatility. These
risks are magnified in emerging markets. The manager’s investment style may become
out of favor and/or the manager’s selection process may prove incorrect, which may
have a negative impact on the Fund’s performance. Because this Fund expects to hold a
concentrated portfolio of securities, and invests in certain regions or industries, it has
increased vulnerability to market volatility.
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.
Portfolio holdings and sector allocations may not be representative of the portfolio manager's current or future investment
and are subject to change at any time.
Percentages are based on total portfolio as of quarter end and are subject to change at any time. For informational
purposes only and not to be considered a recommendation to purchase or sell any security.
ClearBridge Investments, LLC and Legg Mason Investor Services, LLC are subsidiaries of Legg Mason, Inc.
© 2017 Legg Mason Investor Services, LLC. Member FINRA, SIPC. 711372 CBAX107131 D7407 4/17
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PROSPECTUS, AND SUMMARY PROSPECTUS, IF AVAILABLE, AT
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