ClearBridge Investments Select Strategy Q1 2022 Commentary



  • ClearBridge is a leading global asset manager committed to active management. Research-based stock selection guides our investment approach, with our strategies reflecting the highest-conviction ideas of our portfolio managers.
  • The Strategy’s overweight in growth and smaller cap stocks caused it to endure the worst of the selling pressure facing these areas.
  • While our long-term bias of leaning into innovation and growth hurt performance, ownership of high-quality compounders and evolving opportunity stocks helped offset some of the recent volatility.
  • We remained active through market turbulence, exiting a number of positions to manage risk while taking advantage of price dislocations to selectively add to our disruptor exposure as well as several evolving consumer names.

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Market Overview

Despite a rally to end the first quarter, growth stocks endured significant losses to start the year as a confluence of forces worked against higher multiple segments of the market that had led performance through most of the COVID-19 pandemic and initial recovery. While the large cap S&P 500 Index finished 4.60% lower for the quarter and the marketwide Russell 3000 Index dropped 5.28%, the growth-heavy NASDAQ Composite declined 9.10% while smaller capitalization growth indices did even worse, with the Russell 2500 Growth Index down 12.30%.

The rotation out of growth and away from smaller companies commenced in the fourth quarter as the Federal Reserve began ramping up its monetary tightening rhetoric and accelerated into the new year with 40-year high inflation prints leading to the first interest rate increase of the cycle. Russia's February invasion of Ukraine put extreme pressure on input costs for businesses globally, much of which are being passed on to consumers. This is causing inflation to rise beyond our expectations and likely means it will be higher and more durable. We expect the war and subsequent economic sanctions against Russia to pressure company margins and free cash flow through the year.

These macro effects on growth stocks were amplified by their overweight positioning in investors' portfolios as well as valuation extremes reached during an early fourth quarter rally. The ClearBridge Select Strategy is overweight growth and smaller cap stocks and endured the worst of the selling pressure facing these areas in the quarter. This led to underperformance against our core benchmark, the Russell 3000 Index, which holds both growth and value equities. Underperformance was less pronounced compared to the Russell 2500 Growth and Russell Midcap Growth indices.

The most significant losses came among the disruptors that account for a meaningful portion of the portfolio. Since most of the valuation of these rapidly growing companies is based on cash flows expected well into the future, they most directly bear the brunt of valuation math when the denominator of discounted cash flow models - short-term interest rates - rises meaningfully. Higher rates are also raising the cost to borrow, which could eventually dampen consumer demand. These risks impacted several disruptors whose businesses are tied to e-commerce and consumer spending, with e-commerce enablement provider Shopify (SHOP), online used car platform Carvana (CVNA) and residential decking maker Trex (TREX) all down over 50% for the quarter while footwear retailer Crocs (CROX) declined over 40%.

A primary objective of the Strategy is to deliver returns differentiated from passive portfolios and other active managers by focusing on stocks with company-specific drivers. These businesses tend to be more insulated from macro forces and are generally more resilient throughout a market cycle. However, the stocks generally underperform in more pro-cyclical and macro driven markets. While our long-term bias of leaning into innovation and growth hurt performance, our ownership of high- quality compounders and evolving opportunity stocks like Performance Food Group (PFGC), L3Harris Technologies (LHX) and CME Group (CME) helped offset some of the first quarter volatility. The resilience of these companies exemplifies the balance we have sought to achieve in the portfolio with our positioning actions through the COVID-19 period.

Portfolio Positioning

Risk management supports this goal of balance and we were active sellers in the quarter. We trimmed our position in Pioneer Natural Resources (PXD) after the stock gained nearly 40% on surging oil prices and rotated some of that capital into the energy services space.

After a multi-year period of low activity, we believe new energy exploration activity should pick up, which would benefit stocks on the services and equipment side.

We also reduced our consumer exposure to manage increased uncertainty about retail spending in a period of higher inflation and interest rates. This included the sale of apparel retailer American Eagle Outfitters (AEO), a trim of online car sales marketplace Carvana, and the swap of a longstanding investment in off-price retailer Ross Stores (ROST) for Burlington Stores (BURL). We see Burlington as earlier in its maturation cycle with a seasoned management team using a proven playbook. We also exited Cricut (CRCT), a tools and software platform for handmade goods design, and pet supplies retailer Chewy (CHWY) after becoming increasingly concerned about their user metrics. Online gaming platform Zynga (ZNGA) was sold ahead of a strategic acquirer closing its takeover at a large premium.

In addition, volatility provided opportunities to enter new positions at attractive prices. Among disruptors, this backdrop motivated our purchase of electric vehicle maker Tesla (TSLA) during a 25% correction in its shares, as well as Sentinel One (S) in the information security space and Etsy (ETSY), an online marketplace for handmade goods. We also added two new consumer companies we consider evolving opportunities, theme park operator Six Flags Entertainment (SIX) and fragrance maker Coty (COTY). Finally, more compelling valuations resulting from broad selling pressure allowed us to add to existing software investments, including ServiceNow (NOW) and GitLab (GTLB).


Private investments and initial public offerings offer another attractive source of new ideas for the Strategy but the current aversion to riskier, higher multiple growth companies has mostly frozen activity in these markets. Typically we see this during periods of market corrections, as private markets usually need time to catch up to public markets. We remain active in speaking with private and pre-IPO companies but until we see stability returning to equities, we expect issuance to be limited.

The comeback for more growth-oriented stocks to end the quarter is encouraging and we believe the qualities we look for in portfolio companies (innovative, self-funding businesses with long runways for growth and company-specific operating levers) are evergreen attributes. Although the market doesn't always appreciate their resilience (much like we saw during the early days of COVID-19 in 2020), over longer periods of time we believe owning companies with such characteristics will be rewarded. While the recent variability of returns among some portfolio companies we consider disruptors has been pronounced, we maintain confidence in the role of these higher growth names in a balanced portfolio that also includes healthy exposure to steady compounding businesses and evolving opportunities.

Portfolio Highlights

The ClearBridge Select Strategy underperformed its Russell 3000 Index benchmark in the first quarter. On an absolute basis, the Strategy suffered losses in nine of the 10 sectors in which it was invested during the quarter (out of 11 sectors total). The IT, consumer discretionary and industrials sectors were the primary detractors from performance while the energy sector was a contributor.

In relative terms, overall stock selection was the chief detractor from performance. Specifically, stock selection in the IT, consumer discretionary and industrials sectors had the most significant negative impact on results while selection in the health care and financials sectors also proved detrimental. On the positive side, stock selection in the communication services sector and an underweight to the sector contributed to performance.

On an individual stock basis, the largest contributors to absolute returns during the first quarter were Pioneer Natural Resources (PXD), Zynga (ZNGA), Tesla (TSLA), Expedia Group (EXPE) and Performance Food Group (PFGC). The most significant individual detractors were Shopify, Trex, DocuSign (DOCU), Vertiv Holdings (VRTV) and Crocs (CROX).

In addition to the transactions mentioned earlier, the Strategy closed positions in Twilio (TWLO), Dynatrace (DT), Yext (YEXT) and HashiCorp (HCP) in the IT sector, Rivian Automotive (RIVN) and Global-e Online (GLBE) in the consumer discretionary sector, Uber (UBER) in the industrials sector and Altimeter Growth (AGCB) in the financials sector.

Editor's Note: The summary bullets for this article were chosen by Seeking Alpha editors.

This article was written by

ClearBridge is a leading global asset manager committed to active management. Research-based stock selection guides our investment approach, with our strategies reflecting the highest-conviction ideas of our portfolio managers. We convey these ideas to investors on a frequent basis through investment commentaries and thought leadership and look forward to sharing the latest insights from our white papers, blog posts as well as videos and podcasts.

Additional disclosure: Past performance is no guarantee of future results. Copyright © 2022 ClearBridge Investments.

All opinions and data included in this commentary are as of the publication date and are subject to change. The opinions and views expressed herein are of the portfolio management team named above and may differ from other managers, or the firm as a whole, and are not intended to be a forecast of future events, a guarantee of future results or investment advice. This information should not be used as the sole basis to make any investment decision. The statistics have been obtained from sources believed to be reliable, but the accuracy and completeness of this information cannot be guaranteed. Neither ClearBridge Investments, LLC nor its information providers are responsible for any damages or losses arising from any use of this information.

Performance source: Internal. Benchmark source: Russell Investments. Frank Russell Company (“Russell”) is the source and owner of the trademarks, service marks and copyrights related to the Russell Indexes. Russell® is a trademark of Frank Russell Company. Neither Russell nor its licensors accept any liability for any errors or omissions in the Russell Indexes and/or Russell ratings or underlying data and no party may rely on any Russell Indexes and/or Russell ratings and/or underlying data contained in this communication. No further distribution of Russell Data is permitted without Russell’s express written consent. Russell does not promote, sponsor or endorse the content of this communication.

Performance source: Internal. Benchmark source: Standard & Poor’s.

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