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By Bridget B. Hughes, CFA | 04-13-2012 01:00 PM

Avoiding Sector Bets

Legg Mason's Randy Befumo points to how staying clear of significant industry weightings allows his fund to control for volatility.

Bridget Hughes: Hi, I'm Bridget Hughes. I'm an analyst here at Morningstar. I'm here today with Randy Befumo, who is the director of research at Legg Mason Capital Management and is also one of the portfolio managers on the Legg Mason Capital Management Disciplined Equity Research fund.

Thanks for coming in, Randy.

Randy Befumo: Thanks for having me.

Hughes: So this has been a mutual fund now for about 18 months, but it's a mandate that the firm has had for about three years. So, please talk about what this research fund is, what it's supposed to do, and what it's supposed to be for people?

Befumo: What's different with Disciplined Equity Research, or what call internally the Research Fund, from the rest of the Capital Management funds is that it's team-driven. So we have six broad-sector teams within research. Each of the teams is allocated a portion of the portfolio based on their team's percentage of the index which is the Russell 1000, and then they have a high degree of autonomy in deciding what to do with the money, what number of positions to put it in, weightings, and so on.

The only rules effectively for the Research Fund are that it's something on which we've actually done research. We've applied our investment process and come up with some valuation in a sense of where our edge is and where we differ from the market. And so, to the degree that those hurdles are met, each team basically decides independently what it wants to do. So the portfolio as a whole really reflects what we believe are the best ideas of research, but it also does it in a way where there are not significant sector bets and there are not significant industry bets. We believe that a lot of excess volatility can come from industry bets. All in, the Research Fund is a lower-volatility version of the same core Capital Management process that you see in all of Legg Mason's other products.

Hughes: Let's take a little bit more about that research process at Legg Mason Capital Management and maybe how you think it's different from some of the other analyst-run or best-ideas portfolios that are out there?

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