Legg Mason US Smaller Companies Fund update

Richard Troue | Mon 23 January 2017

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• Fund manager Lauren Romeo has not changed her investment approach since Donald Trump’s election victory
• The manager continues to seek good-quality companies trading below their true worth
• She believes Trump will have some positive impact on the US economy as he is seen as pro-business

Our view

Lauren Romeo, manager of the Legg Mason IF Royce US Smaller Companies Fund, seeks good quality companies. They should be in a strong financial position, with little or no debt and a track record of making a good return on the capital invested in the business. She aims to invest when these qualities are not being appreciated by other investors and the company is valued below its true worth. It is an approach we favour and the fund retains its place on the Wealth 150 list of our favourite funds across the major sectors.

Lauren Romeo remains optimistic in her outlook and we feel the long-term prospects for this fund are positive. The manager is part of a well-resourced team with a long and impressive track record of generating strong returns for investors. We are also encouraged to see an improvement in the performance of the fund after a couple of tough years, though as always past performance is not a guide to future returns. In our view this fund provides investors with an excellent opportunity to gain access to the exciting long-term growth potential of US smaller companies. Please note, smaller companies tend to be higher risk than their larger counterparts.

Fund review

Donald Trump’s surprise US election win last November was followed by initial sharp falls in stock markets across the world. The falls were relatively short-lived with the US market closing higher when it became clear Trump had been victorious. Despite some of his more controversial ideas the new President is broadly seen as pro-business, with the aim to boost America’s growth.

It is too early to tell exactly what his presidency will bring, but Lauren Romeo is optimistic on his ability to have some positive impact on the US economy. That said, she doesn’t make investment decisions based on the economic or political outlook; and her investment approach will not change under a Trump presidency.

In recent years the manager's ‘value’ style of investing has been out of favour. Instead investors have favoured ‘growth’ companies that have more stable and predictable growth prospects. Similarly, indebted companies have performed well as the low interest rate environment has allowed them to service debts at ever cheaper rates; companies that Lauren Romeo generally does not invest in. However the manager’s value style came back in to favour in the latter part of the year.

In 2016 the fund’s bias to the industrials and IT sectors boosted performance. SAIA, an interstate trucking company, and Mentor Graphics, a multinational supplier of electronic design automation tools performed particularly strongly. The fund has limited exposure to biotech and healthcare stocks because the manager feels these are speculative investments, with small companies in this sector producing lower revenues. Low exposure to this sector proved beneficial over the last 12 months as the sector fell sharply over fears Hillary Clinton, if elected would introduce drug price regulation.

The fund’s investments in the financial sector, consisting largely of asset management companies including Lazard, dragged on performance. The manager retains her conviction in these investments and feels that their current share prices are not reflective of their true value. For instance, Lazard has significantly improved its cash flow, something the manager feels the market is yet to recognise. Donald Trump is also expected to ease regulation, which could benefit the sector.

Past performance is not a guide to the future. Source: Lipper IM to 31/12/2016

Find out more about this fund including how to invest

Please read the key features/key investor information document in addition to the information above.