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Large Cap Growth Strategy

Third Quarter 2017

Key Takeaways
  • While the FAANGs continued to perform well, the portfolio also benefited from less widely held technology names in the areas of software, payments and semiconductors.
  • Less political scrutiny and positive clinical news lifted the portfolio’s health care stocks to another quarter of solid results.
  • The energy sector showed signs of stabilization as supply and demand come into balance and global growth begins to pick up.
Market Overview and Outlook

Stocks maintained their positive momentum through the third quarter, with large growth stocks again leading the market higher. The S&P 500 Index gained 4.48% for the quarter and is up 14.24% for the year-to-date, the Russell 1000 Index advanced 4.48% while the Russell Midcap Index added 3.47%. The benchmark Russell 1000 Growth Index (+5.90%) outperformed its value counterpart by 279 basis points for the quarter and is ahead 1,280 bps year-to-date.

The U.S. economy has provided a solid backdrop for equities. The final estimate for second-quarter GDP growth was revised upward to 3.1%, the fastest pace in two years. The job market, meanwhile, hit a hiccup in September as the number of positions shrank by 33,000 as a result of hiring delays caused by Hurricanes Harvey and Irma. The unemployment rate, however, declined to a post financial crisis low of 4.2% and wage growth perked up to a better than expected 2.9%. The latest income reading is one of several signs that inflation is appearing across the economy, with consumer prices up 1.9% year-over-year in August while producer prices were 2.4% higher. Consumer confidence, as tracked by both the Conference Board and the University of Michigan, has been strong throughout 2017.

Technology stocks were the best performing sector in the benchmark as investors maintained their preference for companies with the ability to organically generate above-average earnings and revenue. Spurred by the FAANGs (Facebook, Apple,, Netflix and Google (now Alphabet) and Microsoft, the Russell 1000 Growth Index is on pace for a 25% annual gain – a total that discounts a much faster rate of growth than current economic data suggests.

While we have broad exposure to the FAANGs (Exhibit 1), the portfolio is not constructed to excel in a momentum-driven market. Instead, we seek in our technology holdings - and the portfolio overall - more balance and diversification that can promote consistent results through full market cycles. During the third quarter, for instance, the portfolio’s best absolute performers in technology were cloud software provider VMware, digital payments firm PayPal and chip maker Texas Instruments. 

Exhibit 1: The Portfolio is Underweight the FAANGs

  Portfolio Benchmark
Facebook 2.78% 3.34%
Apple 1.91% 6.73% 4.62% 3.20%
Netflix - 0.62%
Alphabet 5.51% 4.86%
Total 14.82% 18.75%

Ending weights in the ClearBridge Large Cap Growth Strategy and Russell 1000 Growth Index as of Sept. 29, 2017. Source: FactSet. remains one of our largest holdings, and while we like the company and its strategy, we believe the market has become very focused on its success at the expense of many other consumer categories. This broad-based concern has created an investment opportunity in consumer names like McCormick, the spice & seasonings company that we added to the portfolio during the quarter. McCormick generates strong organic revenue growth, supported by secular tailwinds and a track record of accretive bolt-on acquisitions. The company runs a high return on invested capital business, maintains a dominant moat and is positioned to deliver solid earnings growth. We also believe the risk posed by private label market gains is manageable as McCormick maintains a strong share in this category. McCormick and Anheuser-Busch InBev were solid quarterly contributors from the consumer staples sector.

Health care was one of the portfolio’s best absolute contributors in the quarter, which is a good reminder of how a sector can quickly change from being maligned to embraced. Drug makers and managed care companies are under less scrutiny in Washington and the pricing pressure concern that has hung over biopharmaceutical stocks for the last several years appears to have abated as the focus in Washington has shifted to tax reform. In 2016, we talked about how as we looked into the future, companies like Celgene, a top performer over the last three months, had tremendous pipelines and were good long-term values. The new FDA chairman has expressed a preference for managing drug price inflation by fast tracking new treatments to market rather than mandating lower drug prices – another catalyst for the industry. We have also seen good clinical news from the biotech space and positive product launches from companies like Regeneron Pharmaceuticals.


"We believe the market has become very focused on Amazon's success at the expense of many other consumer categories."



Such a rotation could impact other portions of the portfolio, such as energy. Sluggish crude oil prices have left energy stocks virtually nonexistent in the growth benchmark, yet we see good risk/reward in this area, particularly in the context of the overall market. Our energy exposure falls into the cyclical growth category of companies working through what we believe are short-term profit headwinds.  Oil prices stabilized during the quarter, rising 12% to $51.64 per barrel and are up over 20% from recent lows touched in June. We have discussed the range-bound nature of oil prices in recent commentaries, with increasing U.S. shale production offsetting production cuts by OPEC. U.S. production growth slowed in the quarter with rig counts declining, some signs of strain on the supply chain impacting production and Hurricane Harvey along the Texas Gulf coast causing drilling in some areas to be temporarily shut down. Projections for global demand are also picking up, with the U.S. expected to be the swing producer over the long term as the market moves from an oversupply to an undersupply situation.

These trends support our belief that energy prices will be higher several years from now and should be beneficial to Pioneer Natural Resources, a vertically-integrated exploration & production company that is less susceptible to price inflation from drilling services providers. Schlumberger, meanwhile, should begin to see results from increased pricing power as drillers work through a $300 billion backlog of deferred projects.

Portfolio Highlights

The ClearBridge Large Cap Growth Strategy underperformed its Russell 1000 Growth Index benchmark during the third quarter.  On an absolute basis, the Strategy had gains in six of the eight sectors in which it was invested for the third quarter (out of 11 sectors total). The main contributors to performance came from the information technology (IT) sector while the consumer discretionary sector was the primary detractor.   

On a relative basis, overall stock selection and sector allocation detracted from performance. In particular, stock selection in the consumer discretionary, materials and energy sectors and an underweight to the IT sector detracted the most from relative results. Stock selection in the consumer staples and industrials sectors and an underweight to consumer staples had positive impacts during the quarter.

On an individual stock basis, Rockwell Collins, Celgene, Visa, VMware and PayPal were the largest contributors to absolute returns. Meanwhile, Chipotle Mexican Grill, Regeneron Pharmaceuticals, Walt Disney, Dentsply Sirona and Pioneer Natural Resources were the greatest detractors from returns.

During the third quarter, we initiated a position in McCormick & Co. in the consumer staples sector and closed a position in Xilinx in the IT sector.

Peter Bourbeau

Portfolio Manager
27 Years experience
27 Years at ClearBridge

Margaret Vitrano

Portfolio Manager
22 Years experience
21 Years at ClearBridge

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  • All opinions and data included in this commentary are as of September 30, 2017 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 nor its information providers are responsible for any damages or losses arising from any use of this information.

  • Past performance is no guarantee of future results.

  • 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.