- Aram Green is the manager of the ClearBridge Select fund, the top-ranked mid-cap stock fund of the past three years, and one of the best over the past five years.
- Green told Business Insider how he find companies that can soar from around $1 billion in value to $100 billion, explained how he balances his portfolio.
- One reason for the fund's success, he says, is that he finds opportunities before large-cap investors do. He's then positioned to benefit when the stocks have appreciated enough for those investors to notice.
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Timing is everything, and some people just have better timing than others.
That might be true of Aram Green, an equity portfolio manager at Legg Mason's ClearBridge unit. Green makes a specialty of finding small-cap stocks that are climbing and ready to take off, and it's made his ClearBridge Select fund one of the most successful mutual funds of the past few years.
It's the top-performing mid-cap fund over the three years that ended October 31, with an annual return of 24.4%, according to Kiplinger. That's handily outpaced its benchmark, the Russell 3000 index, which has returned 14.5% annually over that period. Green also co-manages ClearBridge's small-cap, mid-cap, and SMID-cap growth funds.
While the Select Fund is acclaimed for its mid-cap performance, Green doesn't confine his investments to that range, as he'll stick with companies into the large-cap stage.
"Where a lot of our exposure and performance has been driven is finding these companies that are maybe $1 billion to $5 billion in market cap, and catching them and finding them early, before they're on the radar screen of larger investors," he told Business Insider in an exclusive interview.
He adds that large-cap investors often don't pay attention to companies that small, so if he's already identified something promising and adds it to the fund, his portfolio will benefit as large-cap funds start to pile in or when the company is acquired.
"These companies quickly go from $5-$6 billion companies to $35 billion," he said, because of "the compounding of revenue growth, increasing profitability, cash generation and people realizing that these companies are going after really big market opportunities."
The breakdown
Not surprisingly, Select Fund has a strong tilt toward growth stocks, especially tech and consumer discretionary companies. Green says half of its recent outperformance has come from IT companies, particularly in the software field.
Beyond the fund's sector makeup, Green says he keeps about half the portfolio in companies that he considers highly disruptive, meaning they have a shot at growing 20% or even 100% a year for several years.
"They need innovation on the product and service capabilities to go after either an existing market where there's a sleepy incumbent, or create a new market that didn't exist before," he said. "Those companies that I think can have explosive growth need to have that as an initial starting point."
He adds that those companies also need to have strong management, because leadership is especially important for companies in that relatively early stage.
About a third of the fund's assets are in "compounder" companies that Green considers more stable and defensive.
"They're more mature in terms of their corporate development, they have more operating margin expansion, probably more available free cashflow," he said. "We just think these are good businesses to own any sort of market environment that we're in."
The other major chunk of investments are in what Green calls "evolving opportunities," or stocks that have gone badly off-course, but have a chance to recover.
"Maybe they levered up the balance sheet to make some acquisitions that haven't panned out. Maybe they over promised on new product development that hasn't come through," he said. "And we see a series of positive catalysts unfolding in the near to medium term which is going to start to change the fundamental picture."
Canvasing the landscape, but still being selective
One way he does that involves a lot of meetings with companies he's not going to invest in. Green says he spends a fair amount of time meeting with representatives from private companies. He occasionally invests in late-stage firms, although he doesn't have any such investments rights now.
More often, he takes those meetings to get information: Knowledge about marketplaces, about competitors to the public companies in his portfolio, and about companies he might invest in after they've gone public.
"It adds a lot to the rest of the portfolio in terms of finding opportunities and de-risking the existing investments," he said of the approach.
Over the past year and a half, Green says most of his recent portfolio shifts have been valuation-oriented, including bets on a number of companies that plunged after their IPOs this year.
And after a defensive shift this summer, he's been betting on "disruptors" and moving some money away from the more defensive stocks in the compounding group.
"With the valuation reset that we've seen out of that space, we think valuations went from very expensive to reasonable. So we selectively added some of our exposure back," he said. "They're not screaming cheap, but I think very reasonable given the growth and innovation and the cash generation out of those companies."