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Commentary: Mid Cap Strategy

Steady Activity Supports Balanced Approach

Third Quarter 2020

Key Takeaways
  • Performance was driven by strong results from recently acquired companies and existing holdings we have added to through the recovery from the COVID-19 pandemic. 
  • Our activity level remained high as we positioned the Strategy for a variety of post-pandemic outcomes, jettisoning stocks where visibility has evaporated and adding names with a better line of sight as well as those with the potential to improve in a cyclical recovery.
  • We see resolution of the pandemic and the election as the two biggest unknowns in the near term.
Market Overview

The stock market endured a correction in higher-growth names but still managed solid gains for the third quarter as the economy continued its measured recovery from COVID-19. The S&P 500 Index marched 8.9% higher over the past three months and is up 5.6% year to date as ample liquidity, improving economic data and a lack of attractive investment alternatives supported equities. The benchmark Russell Midcap Index advanced 7.5% for the quarter but remains down 2.3% for the year. Despite a sharp selloff among information technology (IT) and Internet names to start September, growth stocks maintained their leadership with the Russell Midcap Growth Index gaining 9.4% for the quarter, outperforming the Russell Midcap Value Index by about 300 basis points. 

Communication services (+15.9%) and consumer discretionary (+14.7%) were the best-performing sectors in the benchmark, as e-commerce has accelerated through the pandemic. The cyclically oriented materials (+12.9%) and industrials (+11.9%) sectors also outperformed as parts of the economy began to anticipate a recovery in business activity. Energy (-15.6%) was the worst-performing sector, falling from its leadership position in the second quarter as crude oil prices were flat on still-anemic demand, while income-oriented real estate (+0.3%), utilities (+4.3%) and financials (+2.4%) also lagged. 

With the macroeconomic backdrop highly uncertain, our activity level remained high during the third quarter as we seek to position the Mid Cap Strategy for a post-COVID-19 environment. As active managers, our goal is to construct a portfolio that can perform well in any environment by striking a balance between stronger growth compounders advantaged by the economic shutdowns and businesses that will benefit from the normalization of cyclical sectors. Our repositioning throughout the pandemic has been focused on jettisoning stocks where visibility has evaporated and taking advantage of attractive entry points to add new companies with a better line of sight into the future as well as fundamentally sound market leaders that can take market share as the economy recovers. We’re pleased that many of our recent purchases, including SolarEdge Technologies, Vertiv, Avantor and Performance Food Group, as well as existing positions we have added to, like Carvana and Masonite International, have been significant contributors to the Strategy’s third-quarter outperformance.


"Our goal is to construct a portfolio that can perform well in any environment by striking a balance between growth and value stocks."


Financials were a detractor during the third quarter due to low interest rates and credit concerns. We believe the credit overhang could resolve itself in 2021, supporting companies like First Republic Bank.

Health care was also a detractor as BioMarin Pharmaceutical received an unexpected response from the FDA on a hemophilia drug where the regulator requested an additional year of data, pushing the drug launch back. BioMarin’s stock declined by more than the expected value of the hemophilia franchise, leading us to increase the position on weakness. 

Portfolio Positioning

We added six positions in the third quarter, with four in the industrials sector. Regal Beloit manufactures motors, power generation and transmission equipment. A new management team is improving margins and returns as well as strengthening its residential HVAC business. Rexnord makes motion control and water management products whose hygienics business is seeing significant growth opportunities as commercial buildings retrofit restrooms for COVID-19. We believe Rexnord shares are significantly undervalued versus its own fundamentals and industrials peers. WillScot Mobile Mini is a leader in modular office space with 40% market share. The company just acquired Mobile Mini, which offers good cross-selling opportunities while its internal pricing actions and value-added services should drive revenue growth regardless of non-residential construction uncertainty. Clarivate, spun out of information provider Thomson Reuters in 2017, is a leading information services provider with an intellectual property database used by researchers and corporations. The company is run by the former CEO of data provider IHS, Inc., and has multiple initiatives in place to accelerate organic growth and improve margins.

DocuSign was another new addition that we are familiar with from ownership in other small and mid cap portfolios. The leader in electronic document and signature services has surged as COVID-19 has accelerated the shift to digital document management. We also bought back shares of Expedia after selling the position in the early stages of the COVID-19 outbreak. We see a tremendous opportunity for a cyclical rebound in travel over the next three years, with the new management team at Expedia improving productivity while a second-quarter equity and debt offering mitigated the company’s balance sheet risk.

The Strategy’s exits during the quarter were a combination of profit taking and eliminating exposure to uncertain areas of the mid cap market. We sold into strength both Varian Medical Systems, ahead of its acquisition by Siemens, and IPG Photonics, as the company faces greater competition and Rockwell Automation. The sale of commercial real estate broker and operator Jones Lang LaSalle reflected headwinds in the office market as companies balance work-from-home with future office space needs. AmerisouceBergen was sold as it deals with the overhang of potential drug pricing pressures and opioid settlements.


With so little visibility in markets and the economy, we see resolution of COVID-19 and the election as the two biggest unknowns in the near term. The portfolio is well balanced in relation to different COVID outcomes. We own strong quality growth companies compounding already high returns on invested capital, as well as value names with opportunities to improve returns through productivity improvements or the normalization of earnings as the economy recovers. 

Portfolio Highlights

The ClearBridge Mid Cap Strategy outperformed its Russell Midcap Index during the third quarter. On an absolute basis, the Strategy had gains across nine of the 11 sectors in which it was invested during the quarter. The leading contributors were the consumer discretionary and industrials sectors. 

On a relative basis, overall stock selection and sector allocation contributed to performance. Specifically, stock selection in the consumer discretionary, industrials and consumer staples sectors as well as underweights to the energy and real estate sectors drove results. Conversely, stock selection in the health care and communication services sectors detracted from relative returns.

On an individual stock basis, the biggest contributors to absolute returns in the third quarter were Carvana, SolarEdge Technologies, Trane Technologies, Varian Medical Systems and Masonite International. The largest detractors from absolute returns were BioMarin Pharmaceutical, Western Alliance Bancorp, Western Digital, Pioneer Natural Resources and Reynolds Consumer Products. 

Brian Angerame

Portfolio Manager
27 Years experience
21 Years at ClearBridge

Matthew Lilling, CFA

Portfolio Manager
15 Years experience
11 Years at ClearBridge

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  • 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. 

  • 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.