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Large Cap Growth Strategy

Second Quarter 2019

Key Takeaways
  • A dovish tone by the Federal Reserve sparked a June rally that continued a strong run for the market.
  • Our diversified approach to targeting growth stocks at different stages of their business lifecycle led us to several new opportunities during the second quarter.  
  • We are maintaining a balance of offense and defense in the portfolio through what we expect to be a volatile period that is typical late in the market cycle.
Market Overview

Equities endured a roller coaster ride during the second quarter on the way to finishing at new record highs. The S&P 500 Index gained 4.30% during the quarter and is up 18.54% year-to-date, its best first half showing since 1997. Meanwhile, the Russell 1000 Index added 4.25% while the Russell Midcap Index rose 4.13%. Growth stocks again led the way, with the benchmark Russell 1000 Growth Index gaining 4.64% for the quarter to post a first-half return of 21.49%, topping its value counterpart by 80 basis points for the quarter and 525 bps year-to-date.

The U.S. Federal Reserve jumpstarted the latest up leg for equity markets as June remarks by Fed Chairman Jerome Powell took a decidedly dovish tone that hinted at future interest rate cuts. Both stocks and bonds rallied on the news, with the 10-Year U.S. Treasury yield retreating to finish the second quarter 40 basis points lower at 2.0%. A suddenly accommodative Fed, joining the easy monetary policy pledge of the European Central Bank, helped ease volatility caused by heightened trade tensions between the U.S. and China – including the banning of U.S. company sales to Chinese telecom equipment provider Huawei, President Trump’s threat to impose tariffs on Mexico and increasing signs of a slowing global economy.

Markets got a further boost late in the quarter on optimism that the G-20 summit would bring the U.S. and China closer to a trade truce. Despite perceived progress, much remains to be worked out over what the trade framework will ultimately be and how that will affect global supply chains. The companies we own in the Large Cap Growth Strategy can do well in a low growth environment as long as they know the rules. But the administration’s backtracking on trade policy and its use for non-economic reasons – President Trump lifted the Huawei ban and suspended the latest round of Chinese tariffs at the G-20 meeting and backed off a threat to impose tariffs on Mexican imports for poor immigration enforcement at its southern border – creates uncertainty on capital spending. We are seeing a pause in activity across industries from semiconductors to steel companies.

Clearly global economic activity is pausing, and those companies that can grow organically should trade at a premium since growth is scarce. Investors are willing to pay up to own stocks that can thrive on their own, which has driven up the valuation of portfolio holdings such as Visa and PayPal, which are at the forefront of a massive shift to electronic payments, as well as warehouse retailer Costco and spice & seasonings maker McCormick.

We are also seeing a premium in parts of information technology (IT), which is in the midst of a secular shift to cloud-based workflows. One of the top priorities of the CEOs and CTOs we speak with is to get their data out of on-premise servers and into the cloud, which offers lower costs, better security, lower latency and hence better performance. Top five holdings Microsoft and benefited during the quarter from continued strong performance in the cloud parts of their businesses while Equinix, an operator of data centers, also delivered solid results.

Nutanix, a maker of cloud software that enables storage, computing and networking to operate as a single platform, could also see significant upside from helping companies transition to the hybrid cloud. The company was a detractor in the second quarter, however, as it faces increased competition in what is known as the hyperconverged infrastructure market and works through execution issues in moving its business from a licensing to a subscription model. Software makers Palo Alto Networks (information security) and Splunk (data analytics and network security) are also in the midst of business model transitions during which billings and cash flow are often out of sync, causing volatility around short-term results. Like Nutanix, these companies are leaders in their markets and should benefit over time from recurring, subscription-based revenues.  

While the cloud and software-as-a-service are powerful trends, we worry that passive flows into the largest stocks in the market are causing growth benchmarks to become overly skewed toward IT and communication services. The portfolio remains underweight IT and we will continue to be selective in adjusting our positioning in the sector. Our diversified approach to targeting growth stocks at different stages of their business lifecycle led us to several new opportunities during the second quarter.  

Portfolio Positioning

We participated in the IPO for Uber Technologies, which operates the world’s leading rideshare platform. Uber, as well as our first quarter purchase of Grubhub, reflect our approach of seeking out select growth companies that are increasing revenues at above-average rates by applying new or emerging business models to large addressable markets. Both Uber and Grubhub are aggressively investing in new market opportunities and should see profits follow in the years to come.

Uber, which is classified in the industrials sector, is applying its delivery platform to the rideshare, food delivery and freight logistics industries. The newly public company has a sizable lead over its main competitor in the global rideshare market - 78% of Uber rides in 2018 were outside the U.S. - and we believe it is well positioned in the more competitive, but potentially very large, global food delivery market. While the company will face challenges such as regulatory risks, insurance costs, driver compensation, and competition, we believe Uber has scale, top-tier management and share leadership that position it well to thrive profitably longer term.


"We constantly monitor existing holdings to ensure our thesis for owning them is intact."


New holding C.H. Robinson Worldwide also falls in the industrials sector. However, we view the freight transport and logistics firm as a stable growth company with the industry leadership and financial strength to deliver consistent earnings. C.H. Robinson is the share leader in the highly fragmented market that connects truck drivers with less than truckload freight shipments. We see potential for higher operating margins from its technology investment and view fresh food shipped in temperature-controlled trailers as a significant growth opportunity. The company’s profitability is more dependent on volume than pricing which should help balance the risks of growing competition.

In addition to researching new growth opportunities, we constantly monitor existing holdings to ensure our thesis for owning them is intact and that each position is contributing effectively to overall portfolio performance. We exited a position in Biogen following the surprise announcement that the biotechnology firm was cancelling clinical trials for Alzheimer’s treatment aducanumab. We have always recognized the risks in Biogen’s pipeline and continue to see value in its multiple sclerosis and Spinraza franchise, however the cancellation of its Alzheimer’s program could negatively impact the stock’s discounted cash flow and long-term risk/reward profile.

The departure of Biogen, combined with the earlier sales of Regeneron Pharmaceuticals and Celgene, has brought down our biotechnology exposure at a time when the industry is in the crosshairs of potential prescription drug pricing and health care reform. We continue to maintain a meaningful allocation to health care, which was a significant contributor to performance during the second quarter on strength in animal health provider Zoetis and Thermo Fisher Scientific, a company we profiled last quarter. With the political season in full swing, eliminating private insurance has become a popular talking point. We believe this is a highly unworkable solution and would require nationalizing all hospitals and primary care. We view access to quality health care is a bipartisan priority and that portfolio holding UnitedHealth Group should play a key role in this initiative.

Oil services provider Schlumberger was also sold as capital spending on exploration & production in its key markets outside the U.S. have taken much longer to recover than expected. While rising oil prices should benefit the company, less than crisp execution has held back the stock. Yum China Holdings, which operates KFC, Taco Bell and Pizza Hut restaurants in the world’s second largest economy, was sold as improved execution caused the shares to reach full valuation.


We enter the second half against a mixed economic backdrop and far from settled geopolitical landscape. On the corporate front, earnings growth has been good but a step down from the great results of 2018 as the benefits of comprehensive tax reform recede and year-over-year comparables get tougher. The market is also nearing full valuation. Caution is creeping into the IT sector as a semiconductor recovery is being pushed out and hyperscale vendors are digesting previous capacity additions. Regulation of the largest IT and Internet companies could also remain a headwind through the 2020 election cycle.

As discussed above, we have been actively repositioning the portfolio to prepare for these uncertainties. By owning a diversified range of companies with different growth drivers, we are able to maintain a balance of offense and defense through what we expect to be a volatile period typical in the later stages of a market cycle.

Portfolio Highlights

The ClearBridge Large Cap Growth Strategy outperformed its Russell 1000 Growth Index benchmark during the second quarter. On an absolute basis, the Strategy had gains across nine of the 10 sectors in which it was invested (out of 11 sectors total). The primary contributors to performance were the IT and communication services sectors.

On a relative basis, overall stock selection contributed to performance. Specifically, stock selection in the communication services and health care sectors was the primary contributor to relative returns. Stock selection in the materials, real estate and consumer staples sectors also helped. On the negative side, stock selection in the consumer discretionary and IT sectors hurt relative performance.

On an individual stock basis, leading individual contributors to absolute returns in the second quarter included positions in Facebook, Microsoft, Walt Disney, Qualcomm and Visa. Nutanix, Alphabet, Palo Alto Networks, W.W. Grainger and Nvidia were the biggest detractors.

During the second quarter, the Strategy initiated new positions in Uber Technologies and C.H. Robinson Worldwide in the industrials sector and closed positions in Biogen and Regeneron  Pharmaceuticals in the health care sector, Schlumberger in the energy sector, Yum China in the consumer discretionary sector and Red Hat in the IT sector.

Peter Bourbeau

Portfolio Manager
28 Years experience
28 Years at ClearBridge

Margaret Vitrano

Portfolio Manager
23 Years experience
22 Years at ClearBridge

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Related Blog Posts

  • Past performance is no guarantee of future results.

  • 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 author and may differ from other portfolio 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. 

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