Commentary: Large Cap Value ESG Strategy

• Two-thirds of the benchmark Russell 1000 Value Index’s 13.9% gain came from the information technology (IT) sector, led by a surge in memory semiconductor and optical/networking stocks.
• Extreme risk taking in the market has led to a large selloff in the high-quality defensive stocks that make up the backbone of our portfolio.
• Social media litigation is entering a new phase, with recent court decisions suggesting legal and regulatory risk is shifting away from user-generated content toward platform design, with claims increasingly focused on addictive features and youth mental health.

U.S. equities rebounded in the second quarter amid de-escalation of Middle East tensions and a rotation back into AI stocks. Two-thirds of the benchmark Russell 1000 Value Index’s 13.9% gain came from the information technology (IT) sector, led by a surge in memory semiconductor and optical/networking stocks. This very narrow market made it a challenging quarter for a diversified portfolio of higher-quality stocks.

Strategy underperformance came primarily from not owning, or being underweight, this narrower group of commodity-sensitive businesses in the memory, optical and electronic manufacturing services space whose earnings power has been repriced very quickly. Historically, these have been low-quality commodity businesses that posted negative profitability during the past downcycle. We don’t believe that “this time is different,” and we expect these businesses will experience similar (or worse) fates as new supply comes online in the 2027/2028 timeframe.

While we didn’t have exposure to these lower-quality AI stocks, we continue to hold AI-exposed companies with much more durable franchises. For example, Taiwan Semiconductor and Broadcom were both positive contributors as their technologies remain best in class and demand continues to exceed supply. Intel also continues to prove out its turnaround plan as its foundry business appears poised to gain new customers as soon as 2027/2028, and its leading server CPU business is sold out as agentic AI drives more demand for general purpose compute.

We would also note that this extreme risk taking in the market has led to a large selloff in the high-quality defensive stocks that make up the backbone of our portfolio. Given the lower inherent volatility of these businesses, we believe strongly that they will produce superior through-cycle returns, and we have been aggressive in adding to stocks that we believe are trading well below their intrinsic value.

In health care, meanwhile, CVS Health and UnitedHealth Group benefited from a more favorable Medicare Advantage payment update, improving utilization trends and signs of underwriting discipline.

We added Apple during the quarter: the stock was added to the Russell 1000 Value Index in a more impactful than usual index rebalancing (Exhibit 1). Apple is a high-quality, durable franchise with strong free cash flows and a robust balance sheet, and the addition helps our efforts to upgrade portfolio quality and lower balance sheet leverage in an environment of inflation and interest rate concerns. Interest rate sensitivity drove our decision to exit American Tower in the quarter, for example, as the communications tower operator’s high leverage becomes a risk amid persistent inflation. Meanwhile, we trimmed our positions in Intel and Broadcom as market exuberance reflected what could be cyclical peaks for their industry. In addition, we are being cognizant of material reduction of semiconductor exposure as a result of value benchmark rebalancing, which we think is prudent risk management.

Exhibit 1: Significant Mega Cap Benchmark Changes

The opportunity coming out of the quarter, in our view, is not to chase everything that worked. It is to use the reset in quality and defensive stocks to upgrade the portfolio, while doing the work on the narrower AI supply-chain businesses where the facts may have changed. That is an optimistic set-up for our process because prospective returns have improved in the kinds of companies we generally want to own.

The portfolio response is offensive, but still quality-first. We are leaning into areas where valuation, balance sheet strength and earnings durability are improving, including select health care, life sciences tools, managed care, industrials and AI-adjacent businesses with credible free cash flow.

At the same time, we are not abandoning the Strategy’s discipline. The companies we want to own should have durable competitive advantages, pricing power, strong balance sheets and the ability to compound through the cycle. Where a business still depends on commodity pricing, aggressive supply assumptions or peak-cycle margins, we need to be paid for that risk.

Put differently, we want to be more aggressive because the starting point is better, while keeping the hurdle rate high. The work now is to separate genuine franchise improvement from cyclical earnings momentum, add to quality businesses that have been indiscriminately sold, and only expand in AI supply-chain names where normalized returns justify the risk. That is a good setup for our process.

The ClearBridge Large Cap Value ESG Strategy underperformed the benchmark Russell 1000 Value Index for the quarter. On an absolute basis, the Strategy had positive contributions from nine of 11 sectors. The IT, financials and health care sectors were the main positive contributors, while consumer staples and utilities detracted.

In relative terms, overall stock selection detracted. Stock selection in IT and industrials, an IT underweight and an overweight to materials detracted the most. Conversely, stock selection in energy, communication services and health care and underweights to energy and consumer staples contributed the most.

On an individual stock basis, the biggest relative contributors during the quarter were Intel, Taiwan Semiconductor, CVS Health, Microchip Technology and not owning Exxon Mobil. The biggest detractors were Haleon, McKesson and not owning Micron Technology, SanDisk and Advanced Micro Devices.

In addition to the transactions mentioned above, we exited a position in Illinois Tool Works in the industrials sector and received shares of Honeywell Aerospace in the industrials sector following its spinoff from holding Honeywell International.

Social media companies are coming under increasing pressure from state attorneys general, school districts and parents arguing platforms such as Meta Platforms’ Facebook and Instagram, Snapchat, TikTok and Alphabet-owned YouTube knowingly designed features that are addictive to young users and failed to adequately warn about mental health risks.

The success of recent lawsuits in California and New Mexico against Meta and YouTube could be impactful for social media broadly, raising regulatory and financial risk and creating the potential for reputational damage.

In New Mexico, a jury awarded $375 million in civil penalties against Meta for misleading the public about predator exploitation on its platforms in violation of state consumer protection law.

Not long after, a jury in Los Angeles became the first to hold social media companies responsible for contributing to a plaintiff’s mental health harm via addictive design. The jury determined that Meta and YouTube were liable for negligence and failure to warn related to the plaintiff's alleged social media addiction. The plaintiff was awarded $6 million in damages.

These lawsuits are notable for not seeking action against the content featured on the platforms — for years, such attempts were unsuccessful, largely due to Section 230 of the Communications Decency Act, which protects social media companies from liability related to content posted by their users. Instead, the lawsuits attempt to find fault in the design of the products.

They also follow several milestone national regulations around the world that have involved restrictions on youth access to social media (Exhibit 2). Several U.S. states — such as Utah, Arkansas, Louisiana, Florida, Georgia, Tennessee and Nebraska — have also passed laws restricting minors’ use of social media, although many of these are currently being challenged in court.

Exhibit 2: National Restrictions on Youth Access to Social Media

ClearBridge owns both Meta and Alphabet in several portfolios, and we are cognizant of the risks to both society from social media and the companies via potential liability. Against this backdrop, we recently engaged with Meta to discuss youth safety. In our conversation in May, we sought to test the real-world effectiveness, credibility and trade-offs of Meta’s youth safety efforts, while probing regulatory risk, reputational risk with financial penalties and competitive positioning.

Meta shared that it believes its youth safety measures such as AI-based age verification, content moderation and privacy and parental controls are best-in-class, although this could be challenged. The company also shared that it supports youth safety regulation; its requests for regulation would be for no outright bans, consistency across geographies and equal application to all social media companies.

Meta noted that its Teen Accounts enable the above safety measures by default, it employs AI to screen account content for signs that a user may have lied about his or her age and it automatically age gates as appropriate. In aggregate, these features have led to a “marked improvement” in compliance and outcomes, according to the company. In response to critics that claim these features still let through inappropriate content, the company believes these instances of algorithm failure are exceptions rather than the norm.

"ClearBridge’s approach focuses on the companies’ risk management regardless of the source of risk." 

We advised the company to disclose the data supporting its claims that its youth initiatives are working and leading to “marked improvement,” as it did not provide any during the meeting. Further, we shared our preference that, to lend greater credibility to the claims, this data should be audited by a third party.

We also explained our difficulty in locating information on these issues on Meta’s websites. We noted that information difficult to find for professional investors would likely be even more challenging for everyday users — parents, for example — to locate and to inform their decisions to use the platform. We asked the company to consolidate all its statements on this subject in a single place — rather than spread it out across several different websites — to make it easier for various stakeholders to find and evaluate, similar to what the company does for its environmental disclosures. Meta was receptive to our input.

In June a trust and safety company that helps platforms and AI developers detect and prevent harmful online behavior and unsafe AI outputs published a study in cooperation with Meta that used Meta’s content standards to compare the Teen Accounts content experience on Instagram versus a competitor platform. Testing was conducted from mid-December 2025 to mid-January 2026 and found that the safeguards applied to Teen Accounts on Instagram performed better than a competitor platform across several dimensions. While the period may seem short for such a study, Meta has disclosed that Teen Accounts are in the hundreds of millions; as users access the apps multiple times a day, this would aggregate to a statistically significant sample, although ideally the company could disclose time series data showing content moderation improvement over a longer horizon. Also in June, Meta rolled out its Teen Accounts protections globally to all apps as well as parental alert notices for inappropriate content searches by teens.

Content responsibility remains a key component in assessing social media platforms such as those operated by Meta and Alphabet. ClearBridge’s approach stresses several components of this topic: rigorous content moderation can potentially limit harmful or illegal content while seeking to maintain platform integrity, and child safety raises questions of regulatory and reputational risk.

Over the years of ClearBridge’s ownership with Meta and Alphabet, we have witnessed both companies improving their content responsibility (Exhibit 3). Meta has made progress on its content policy by appointing an independent content oversight board and then growing its scope. After historically having some issues around brand safety and protecting children from sensitive content, YouTube has made significant progress in this area through staffing, technology and policy development. In 2021, YouTube became the first digital platform to receive accreditation for content-level brand safety from the Media Rating Council (MRC), following an independent audit of its content moderation, monetization and ad placement systems.

At the same time, recent litigation with social media suggests the risk profile for these companies is evolving; regulatory risk is shifting from content moderation to product design. ClearBridge’s approach focuses on the companies’ risk management regardless of the source of risk. As our engagement with Meta shows, we also focus on transparency, as investors need evidence that youth safety initiatives are working in practice, not only descriptions of policies or tools.

Exhibit 3: Content Responsibility Improvement Timeline

Social media is a fast-moving topic involving billions of participants — Meta reports 3.5 billion daily active users, while Alphabet reports over 2 billion signed-in monthly users for YouTube. We continue to educate ourselves on the sustainability factors affecting this industry as we monitor the evolution of litigation and the broader social media bans; we will continue to actively incorporate this analysis into our investment process and stewardship activity.