In an Unprecedented Market, Today's Value Is Tomorrow's Return
Leading managers from ClearBridge Investments, Western Asset and Royce & Associates see prospects for healthy long-term returns
PASADENA, Calif., March 25, 2015 /PRNewswire/ -- As the US economy continues to improve and the Federal Reserve slowly unwinds its policy of quantitative easing (QE), savvy investors will be well served by taking a strategic approach to generating returns that emphasize value. This was the broad consensus of a panel of experts at "Investing with Conviction," a recent Los Angeles-area advisor forum sponsored by Legg Mason.
Moderated by Consuelo Mack, executive producer and managing editor of Consuelo Mack WealthTrack, the panel -- "Time, Money and Security Selection: The Art of Value Investing"-- featured renowned asset managers like Chris Clark, president and co-chief investment officer of Royce & Associates, who said the value strategy is sound but can be challenging to implement. "Value is in the eye of the beholder," he noted, and often depends on the perspective of time. "We are in the business of buying mispriced assets, things that challenge the conventional wisdom—and the payoff can require a long-term commitment."
Scott Glasser, co-chief investment officer and portfolio manager at ClearBridge Investments, agreed. "Creating value is about arbitraging time," he said. "It's a blunt process, giving you an idea of what an asset is worth; it's up to the investor to compare the upside and downside and make an informed decision."
"Understanding volatility is another central factor in determining value," said Michael Buchanan, deputy chief investment officer and head of global credit at Western Asset.
Critical to that understanding is developing an appreciation of volatility's hidden benefits. "Volatility is the friend of the long-term investment," Glasser said. "That's what creates opportunity."
Finding those opportunities—and avoiding potential pitfalls—is a matter of doing careful homework and watching for signs. "The takeaway today is that regulators can be our friends," said Buchanan. "At the same time, I wouldn't buy Treasuries or Japanese government bonds as a store of value." He noted that the high-yield bond market looks particularly interesting and predicted that interest rates, while adjusting upward, would not go dramatically higher. "I think this cycle is going to last longer, particularly because of the severity of the downturn in 2007-08," he said.
For his part, Glasser is optimistic about stocks. "It's a mature bull market, which clearly has an extended lifespan, as long as you don't see a recession in the outlook," he said. "My message would be to stay the course: Stocks still make sense. At this point, it would be normal to grow into future earnings."
But, according to Clark, change may be on the horizon in the small cap space. "The impact of QE in this arena is that businesses receiving artificial support are the ones that have been thriving. But the next five years will look very different, and we are likely to see a switch in investor preferences." Clark believes high-quality stocks are going to matter now and that opportunities will surface in pro-cyclical areas of the market.
One way to identify value, the panelists concluded, is to utilize active share—a metric of how much a portfolio's holding differs from the benchmark. "The bottom line," Glasser said, "is that we are in the business of adding value for the client, and doing so means making sure you are differentiated from an underlying index."
About ClearBridge Investments
ClearBridge Investments is a well-established global investment manager with a legacy dating back more than 50 years and $114.6 billion in assets under management, as of December 31, 2014. Clearbridge is committed to long-term results through active management. Strategies are oriented around three primary investment objectives: low volatility, high active share and income solutions. To learn more about ClearBridge Investments, visit their web site at www.clearbridge.com.
About Royce & Associates, LLC
For more than 40 years Royce & Associates, LLC, investment adviser to The Royce Funds, has used a disciplined, value-oriented approach to select micro-cap, small-cap, and mid-cap companies. We have a seasoned staff of investment professionals, most with more than 15 years of experience. Chuck Royce, the firm's founder and a pioneer of small-cap investing, enjoys one of the longest tenures of any mutual fund manager. Royce & Associates, LLC is a wholly owned affiliate of Legg Mason Inc. To learn more, visit their web site at www.roycefunds.com.
About Western Asset
Western Asset Management is one of the world's leading fixed-income managers with $466 billion in assets under management as of December 31, 2014. The firm is a wholly owned, independently operated subsidiary of Legg Mason, Inc. (NYSE: LM) From offices in Pasadena, Hong Kong, London, Melbourne, New York, Sao Paulo, Singapore, Tokyo and Dubai, the company provides investment services for a wide variety of global clients, across an equally wide variety of mandates. To learn more about Western Asset, visit their web site at www.westernasset.com.
About Legg Mason
Legg Mason is a global asset management firm with $711.0 billion in assets under management as of February 28, 2015. The Company provides active asset management in many major investment centers throughout the world. Legg Mason is headquartered in Baltimore, Maryland, and its common stock is listed on the New York Stock Exchange (symbol: LM).
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