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By Shannon Zimmerman | 09-10-2013 12:00 PM

ClearBridge Fund Prepared for Extended Rally

The broad stock runup in the first half of 2013 was a boon to ClearBridge Aggressive Growth, and comanager Evan Bauman says that the fund is well-positioned for the market going forward.

Shannon Zimmerman: For Morningstar, I’m Shannon Zimmerman here today with Evan Bauman, who, along with Richie Freeman, manages ClearBridge Aggressive Growth, a fund with about $8 billion in assets in Morningstar's large-cap growth category.

Evan, thank you very much for being with us today.

Evan Bauman: My pleasure, Shannon. Good to be here.

Zimmerman: Let's get started and talk a little bit about the fund. This is the fourth consecutive year that the fund has delivered really strong performance in both relative and absolute terms. Congratulations on your year. What's behind it so far in 2013?

Bauman: So I'll knock on Formica, first off, but it's been a very broad-based year, which is rewarding. It hasn't been one stock or one sector that's helped us. It's been a number of companies really executing, a lot of companies which have been able to show growth this year. When the economy is still growing slowly, a lot of our names have been able to outpace that growth. Number of the health-care and the biotech companies that we own have done very well.

A company like Biogen Idec, which has actually been in the fund since the early 1990s, has been a very strong performer due to a very exciting launch of a new oral multiple sclerosis compound. Amgen as well, which recently announced an acquisition of Onyx Pharmaceuticals, has been strong from an earnings perspective and a stock perspective. And a name like Vertex, which has been a company that also had very positive data on its cystic fibrosis franchise, continues to do very well. A number of the tech names, as well, SanDisk and Seagate to name a couple, have been strong performers. But, like I said, the nice part about this year is it hasn't been one or two things; it's been pretty broad-based.

Zimmerman: I have a couple of follow-up questions that come out of that. Take Amgen and the acquisition. So as news broke that that was something that was being considered by Amgen's management--because I know that for you and Richie both assessing a management team and their ability to allocate capital well is an important part of the consideration.

Bauman: Extremely important.

Zimmerman: Yes, as you add a new name or increase an existing one. So, in general, if you look at the academic literature, acquisitions tend not to work out certainly relative to share repurchases, and certainly even share repurchases don't do as well as dividends. How do you judge a management team's ability to allocate capital when they are more on the acquisitive side?

Bauman: We've historically been on the right side of the acquisitions: the companies getting acquired. We've had over 50 takeovers since the fund was launched almost 30 years ago. I think when you are on the buy-side and we've had a couple of companies, Valeant Pharmaceuticals and Amgen, which have been the actual acquirers, I think you want to look at what is the cost of capital, what are the other opportunities for that cash. If you look at Amgen, they've actually been great stewards of capital. They bought back a lot of stock in a very quick tender formation at much reduced prices relative to where the share price is today. They have been paying out a dividend. They continue to buy back shares, and then with excess cash they have been able to make, what it will be in a couple of years, a very accretive acquisition to their earnings.

If you can buy a company growing faster than yourself, as well as do other accretive activities with your cash, I think it has worked out really well. I think health care has been an area of increased consolidation. I mentioned Valeant, which acquired Bausch & Lomb earlier this year. That is a theme which we think continues. I think there is going to be a theme, which we've seen in our portfolio, where historically names like Genzyme, Chiron, Millennium, and ImClone have all been acquired, and what we're seeing today is Big Pharma continue to chase growth and do so through acquisition. Good acquisitions, we're big fans of, and I think, again, these are more than one-off deals. I think this is a theme that's here to stay for a while right now.

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