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Large Cap |
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At a Glance
- Primary Benchmark: Russell 1000® Value Index.
- Universe: Companies with market capitalization in excess of $1 billion that we believe are substantially undervalued on a P/E, P/B, P/CF or other valuation basis.
- Portfolio: Our portfolios are designed to be well-diversified and carefully structured with regard to economic sensitivity. Greater than 50% of companies will have a market capitalization in excess of $5 billion.
- Social screens are used to help identify and exclude companies that do not meet our investors' standards for corporate behavior.
Objective
We seek to outpace the long-term total returns of the Russell 1000 Value Index, while adhering to our socially conscious mandate.Typical Investment Guidelines
| FACTOR | GUIDELINE | |
| Number Of Holdings | 60-75 | |
| Range Of Stock Weightings At Purchase | 1%-3% | |
| Maximum Stock Weighting | 5% | |
| Maximum Industry Weighting | 15% | |
| Maximum Sector Weighting | 30% | |
| Maximum ADR Exposure | 15% | |
Investment Process
Quantitative Screens
We build a portfolio of stocks based on quantitative screens and internal research ideas: a majority of our stocks have a market capitalization greater than $5 billion and are cheap on a price-to-earnings, price-to-book value, price-to-cash flow or other current valuation basis relative to peers, their own history and the market. For the companies in our research universe, we undertake rigorous fundamental analysis.
Fundamental Analysis
Through fundamental analysis, we seek to understand the reasons a stock is cheap or out-of-favor and to identify those companies that are truly undervalued and most likely to return to normal valuation levels and profitability. Conclusions are based on a company's financial condition, competitive position in its industry, and quality of management. In addition, we focus on long-term macroeconomic conditions and industry trends in order to identify and measure the risks associated with a company's business. These factors lead us to identify those companies that have the best potential and necessary catalysts for a return to normal levels of profitability and valuation.
Catalyst recognition can be a key differentiating aspect of our approach. Securities may have multiple catalysts and catalysts may be triggered by micro or macro events. While we emphasize catalysts for recovery, the fundamentals must warrant purchase. Stocks will not be added to portfolios simply because they are "cheap" relative to the market.
Although our primary focus is on bottom-up stock picking, top-down considerations are a key part of our process. Macro-economic factors affect a company's outlook and thus are an important factor in determining what might drive a company's stock to the substantial outperformance we seek. Also, these factors may influence our decision regarding our weighting in an industry or sector, absolute and relative to an index. Wall Street often emphasizes thematic trends: if we identify a theme that is consistent with our primary value focus, we will attempt to capture the opportunity/trend in our portfolios.
Social Screens
Subsequent to identifying stocks suitable for purchase, social screens are employed to identify and exclude non-conforming stocks and replace with worthy alternatives. Screens that may be employed by the firm include: alcohol, tobacco, gambling, defense contracting, environment, community relations, or any other client specific requirement. The firm will consult with industry leaders and other professionals to evaluate a company's social record, and will avoid those companies with poor records and favor those with innovative solutions.Sell Disciplines
We follow a disciplined approach to sell decisions, with securities typically sold for three main reasons - valuation, fundamental deterioration, and stock-against-stock competition. A stock is typically reviewed for sale as it approaches our estimate of its normalized valuation and no longer offers compelling upside potential. Valuation, both on an absolute and relative basis and in light of the potential for continued earnings growth and operating improvements, is the primary factor in sell decisions. Another situation that would lead us to sell is when the fundamentals have deteriorated to the point that we believe the prospect for re-valuation is impaired or the anticipated catalysts, which resulted in the initial purchase, fail to materialize within a reasonable timeframe. Furthermore, a stock may be sold when a more compelling opportunity arises leaving a current holding to be sold as a source of funds.Representative Portfolio Characteristics (as of 6/30/2008)*
| CHARACTERISTICS | BRANDYWINE | R1000V |
| Price/Earnings | 12.4 | 12.6 |
| Price/Book | 1.7 | 1.7 |
| Price/Cash Flow | 7.4 | 7.6 |
| Dividend Yield (%) | 2.5 | 3.1 |
| Avg. Market Cap ($B) | 54.6 | 92.3 |
| Holdings | 64 | 662 |
| Turnover (% last 12 months) | 10.7 | - |
Top Ten Holdings (as of 6/30/2008)*
| COMPANY | WEIGHT (%) | COMPANY | WEIGHT (%) |
| IBM | 5.0 | OGE Energy | 2.5 |
| Devon Energy | 4.4 | Apache | 2.5 |
| ConocoPhillips | 3.8 | Bank of America | 2.5 |
| Air Products & Chem. | 3.0 | BP PLC | 2.3 |
| Burlington Northern | 2.7 | Hewlett-Packard | 2.2 |
* Supplemental Information. Data as of 6/30/2008. R1000V = Russell 1000 Value Index.
Please refer to our GIPS compliant presentation, which includes performance footnotes, fee schedules, index descriptions and disclosures. The data represent the aggregate characteristics of all securities held in the representative portfolio, an actual commission account not subject to taxation. Data is obtained from FactSet and Russell. It should not be assumed that investments in any top ten holdings listed were or will prove to be profitable. Top ten holdings may no longer be held in client portfolios. The holdings of any particular account may vary based on any investment restrictions applicable to the account. This information is for illustrative purposes only, is subject to change at any time and should not be considered investment advice or a recommendation to buy or sell any particular security. In accordance with Rule 206(4)-1 under the Investment Advisors Act of 1940, upon request, we will furnish you with a list of all recommendations made by Brandywine within the immediately preceding twelve months. There is no guarantee that holding securities with relatively high (or low) price-to-earnings, price-to-book, or price-to-cash flow will cause the portfolio to outperform its benchmark or index.
The Russell 1000® Value Index is a trademark of the Frank Russell Company.
Russel™ is a trademark of the Frank Russell Company.
Representative Sector Weights (as of 6/30/2008)*
* Supplemental Information. Data as of 6/30/2008. R1000V = Russell 1000 Value Index.
The data represent the aggregate characteristics of all securities held in the representative portfolio, an actual commission account not subject to taxation. Data is obtained from FactSet and Russell. Sector weights are included for informational purposes only and should not be perceived as investment recommendations. It should not be assumed that investments in any sectors listed were or will prove to be profitable. The sector weights of any particular account may vary based on any investment restrictions applicable to the account.
The Russell 1000® Value Index is a trademark of the Frank Russell Company.
Russel™ is a trademark of the Frank Russell Company.
Quarterly Portfolio Manager Commentary (as of 6/30/2008)
With respect to our strategy, stock selection, versus the Russell 1000 Value? Index, resulted in strong relative performance for the Industrials. An underweight and slightly better stock selection led to a positive comparison in Financials. Other top performers enhancing portfolio returns included several holdings in the integrated energy and oil and gas exploration space, which rose noticeably in sympathy with higher oil and gas prices. Negatively impacting the portfolio during the quarter were a poor relative showing in Utilities, weak stock selection in Materials, and some poor performances by assorted individual names.
It would appear that the problems which have roiled investors since May will persist. The credit crisis remains worrisome, as write-offs are still being taken and new capital is still being raised by financial institutions. Housing inventories remain high and prices reflect few signs of bottoming at this juncture. Oil prices remain high and could be headed higher. Nevertheless, we derive some optimism from currently reasonable valuations, low interest rates, stimulative monetary and fiscal policies, high cash levels and extremely negative investor sentiment. Stocks generally bottom just at the time when investors abandon all hope. We sense that we are nearing such a state of capitulation and are therefore inclined to 'stay the course'.
You should not assume that investments or strategies discussed in this commentary were or will be profitable, or that the investment decisions Brandywine Global makes in the future will be profitable or equal to the investment performance discussed in this commentary. The data and information presented in a Brandywine Global commentary is believed to be accurate and reliable as of the date recorded. Brandywine Global will not undertake to update the data and information presented at a later date. This commentary may not reflect the current views of the featured speaker and may not reflect current or sudden market activity.
Annualized Composite Returns (as of 6/30/2008)
| PERIOD | GROSS | NET | R1000V | S&P 500 | EXCESS GROSS RETURN |
|
| R1000V | S&P 500 | |||||
| QTD | -4.77 | -4.98 | -5.31 | -2.73 | 0.54 | -2.04 |
| YTD | -13.50 | -13.89 | -13.57 | -11.91 | 0.07 | -1.59 |
| 1 Year | -18.41 | -19.15 | -18.78 | -13.12 | 0.37 | -5.29 |
| 3 Year | 4.44 | 3.51 | 3.53 | 4.41 | 0.91 | 0.03 |
| 5 Year | 10.09 | 9.12 | 8.92 | 7.58 | 1.17 | 2.51 |
| 7 Year | 4.81 | 3.88 | 4.73 | 2.45 | 0.08 | 2.36 |
| 10 Year | 6.91 | 5.96 | 4.92 | 2.88 | 1.99 | 4.03 |
| Since Inception** 7/1/1998 |
6.91 | 5.96 | 4.92 | 2.88 | 1.99 | 4.03 |
Calendar Year Composite Returns (as of 6/30/2008)
| YEAR | GROSS | NET | R1000V | S&P 500 | # of ACCTS |
MARKET VALUE ($MM) |
FIRM ASSETS ($MM) |
STD. DEV. (%) |
| 2008 | -13.50 | -13.89 | -13.57 | -11.91 | 14 | 109 | 47,243 | 0.32 |
| 2007 | 3.14 | 2.22 | -0.17 | 5.49 | 15 | 146 | 49,208 | 0.41 |
| 2006 | 19.19 | 18.14 | 22.25 | 15.79 | 14 | 141 | 39,241 | 0.34 |
| 2005 | 9.60 | 8.63 | 7.07 | 4.91 | 11 | 102 | 26,332 | 0.22 |
| 2004 | 15.85 | 14.83 | 16.49 | 10.88 | 11 | 117 | 18,547 | 0.32 |
| 2003 | 36.75 | 35.56 | 30.03 | 28.69 | 7 | 85 | 12,680 | 0.55 |
| 2002 | -23.44 | -24.14 | -15.52 | -22.10 | 7 | 68 | 7,990 | 0.00 |
| 2001 | 4.65 | 3.72 | -5.59 | -11.88 | 5 | 58 | 7,772 | 0.00 |
| 2000 | 25.44 | 24.34 | 7.01 | -9.11 | 5 | 66 | 6,683 | 0.00 |
| 1999 | 11.84 | 10.85 | 7.35 | 21.04 | 4 | 55 | 6,583 | 0.00 |
| 1998 | -6.03 | -6.46 | 3.10 | 9.23 | 4 | 53 | 7,327 | 0.00 |
Data as of 6/30/2008. R1000V = Russell 1000 Value Index, S&P 500 = S&P 500 Index.
** Supplemental Information.
Organization: Brandywine Global Investment Management, LLC (the "Firm") is a wholly owned, independently operated, subsidiary of Legg Mason, Inc. The Firm has prepared and presented this report in compliance with the Global Investment Performance Standards (GIPS®). For the periods July 1, 2000 through June 30, 2006, the Firm has been verified by Kreischer Miller. A verification includes assessing whether the Firm (1) complied with the composite construction requirements of the GIPS standards on a firm-wide basis, and (2) designed its processes and procedures to calculate and present performance results in compliance with the GIPS standards. Copies of the verification reports are available upon request. Disclosed total firm assets represent the total market value of all discretionary and nondiscretionary, fee-paying and non-fee-paying assets under the Firm's management. Composite Description: Large Cap Value Equity Socially Conscious Composite (the "Composite") Inception date: July 1, 1998. Creation date: March 15, 2002. The Composite includes certain fee-paying, actively managed large cap accounts with socially responsible restrictions and invested in our Large Cap Value Equity Socially Conscious product. The strategy uses fundamental valuation methodology to select domestic equity securities with market capitalizations of greater than $1 billion. The portfolio investments are in approximately 60 - 75 securities. The Composite returns are benchmarked to Russell 1000® Value and Standard & Poor's 500® indices. The Russell 1000 Value Index offers investors access to the large-cap value segment of the U.S. equity universe. The Russell 1000 Value is constructed to provide a barometer of the large-cap value market. The S&P 500 is a broad measure of U.S. domestic large cap stocks. The 500 stocks in this capitalization-weighted index are chosen based on industry representation, liquidity, and stability. Performance Calculation: Preliminary data, if so noted, reflects unreconciled data for the most recent reporting period. Portfolios are valued daily on a trade date basis and include dividends and interest as well as all realized and unrealized capital gains and losses. Return calculations at the portfolio level are time-weighted to account for periodic contributions and withdrawals. Performance results are calculated on a before tax, total return basis. Prior to July 1, 2007, portfolios were included in the Composite beginning with the first full quarter of performance through the last full quarter of performance. After July 1, 2007, portfolios are included in the Composite beginning with the first full month of performance through the last full month of performance. The Composite returns consist of size-weighted portfolio returns using beginning of period values to weight the portfolio returns. Monthly linking of interim performance results is used to calculate quarterly and annual returns. Composite valuations and returns are computed in U.S. Dollars ("USD"). The results are presented in USD or in other currencies (to accommodate overseas investors), the latter by converting monthly USD returns into other currency returns using the appropriate currency exchange rate returns. Gross returns reflect the deduction of trading expenses. Net of fee returns reflect the deduction of trading expenses and the highest investment management fees charged within the composite membership as stated in the fee schedule below. Composite dispersion is calculated using the asset-weighted standard deviation method for all portfolios that were in the Composite for the entire year. Composite dispersion is not presented for periods with five or fewer portfolios. The number of accounts and market values are as of the end of period. Past performance is no guarantee of future results. A complete list describing the Firm's composites as well as any additional information regarding the Firm's policies for calculating and reporting performance results is available upon request. Fee Schedule: Institutional Client Separate Account Management Fee Schedule (minimum initial investment: $10 million): 0.900% on the first $10 million; 0.700% on the next $40 million; 0.500% on the next $50 million; 0.350% on the next $100 million, and 0.250% on any portion of assets in excess of $200 million. Institutional Client Commingled Account Management Group Trust Fee Schedule (minimum initial investment: $1 million): 0.900% flat fee on all assets. Additional information on the Firm's fee schedule can be found in Form ADV Part II which is available upon request.
Portfolio Team
Paul R. Lesutis, CFA
Managing Director & Portfolio Manager
Paul serves as co-lead portfolio manager of our Fundamental Large Cap Value Equity strategy. In addition, he is responsible for research coverage of the banking and paper and forest products industries, contributing insights and stock recommendations to all of the firm's Large Cap Value Equity strategies. Paul joined the firm in 1991 and has 30+ years of industry experience. Previously, he served as executive vice president, chief investment officer and portfolio manager with Provident Capital Management, Inc. (1984-1991); director of equity research and portfolio manager with First Pennsylvania Bank (1971-1984), and a securities analyst with E.I. du Pont de Nemours (1966-1971). Paul is a CFA charterholder and earned an M.B.A. from Drexel University and a B.S. in Accounting from St. Joseph's University. He is a member of the firm's Executive Board.
Earl J. Gaskins
Managing Director & Portfolio Manager
Earl serves as lead portfolio manager for our Socially Responsible Large Cap Value Equity strategy and is co-lead portfolio manager for our Fundamental Large Cap Value Equity strategy. In addition, he is responsible for research coverage of the chemicals and energy sectors, contributing insights and stock recommendations to all of the firm's Large Cap Value Equity strategies. Earl joined the firm in 1996, bringing with him 18 years of industry experience. Previously, he was vice president, portfolio manager, and director of research with Provident Capital Management, Inc. (1985-1996); director of the Office of Community Development of the City of Philadelphia (1980-1985), and a securities analyst with Provident National Bank (1973-1980). Earl earned a J.D. from Temple University and a B.A. in Political Science from Yale University.
Patrick S. Kaser, CFA
Portfolio Manager
Patrick is a member of the Large Cap Value Equity team. He serves as lead portfolio manager for the Large Cap Core Equity strategy and provides research coverage for the Fundamental Large Cap Value strategy. Patrick is responsible for researching the healthcare and insurance sectors, contributing insights and stock recommendations. He joined the firm in 1998. Before becoming a portfolio manager, Patrick worked for the firm as a senior marketing associate (1998-2000). He was also with Dean Witter as an account executive (1996-1997). Patrick is a CFA charterholder and earned an M.B.A. in Finance from the University of Delaware and a B.A. in Political Science from Arizona State University. He is a member of the CFA Society of Philadelphia and has been quoted in The Wall Street Journal, BusinessWeek, and The Washington Post and has appeared on Bloomberg television and radio.
Thomas DeHudy, CFA
Senior Research Analyst
Tom provides research support for our Large Cap Value Equity strategies and is responsible for research coverage of the technology and telecom industries. He joined the firm in July of 2005, bringing with him 24 years of industry experience. Previously, Tom was a portfolio manager and senior analyst at MTB Investment Advisors (2001-2005); a senior analyst at Lord, Abbett & Company (1999-2001); a portfolio manager and analyst at Howard Hughes Medical (1989-1999); an analyst and vice president at Harbor Capital Management (1986-1989), and a senior analyst at Harvard Management Company (1982-1986). Additionally, he served as senior analyst at Venture Economics (1980-1981) and was part of the Presidential Management Program (1978-1980). He is a CFA charterholder and earned an M.S. in Public Policy and a Bachelor of General Studies from the University of Michigan. Tom is a member of the CFA Society of Washington, D.C.
Tamer Elshourbagy
Research Analyst
Tamer is a member our Large Cap Value Equity team and is responsible for research coverage of the retail, restaurant, and transportation industries. Prior to joining Brandywine Global in 2001, Tamer served as an international corporate actions administrator for the Vanguard Group (1999-2001). He earned a B.S in Finance from Pennsylvania State University.
David A. Tattersall
Equity Head Trader
Dave is the head trader for Brandywine Global's equity portfolios. Prior to being appointed to this position in March 2007, he served as lead equity trader for the firm's Diversified Value Equity portfolios in addition to providing support to the Absolute Value Equity portfolio teams. Dave's previous experience with the firm includes serving as joint trader for the International Value Equity portfolios, primary trader for the Wealth Management Group channel, and backup trader for Absolute Value Equity and Large Cap Value Equity portfolios. He joined the firm in 2000, bringing with him 15 years of industry experience. Previously, Dave was with OTA Limited Partnership, a full-service institutional broker/dealer, as a financial analyst/trader (1989-2000); First Federal Savings Bank as a senior accountant (1987-1989), and Beneficial Mortgage Corporation as the loan accounting manager (1985-1987). Dave earned a B.A. in Accounting from Pennsylvania State University.
Donna Van Vlack
Vice President, Equity Trader
Donna is the lead trader for the firm's Large Cap Value Equity portfolios. Donna joined the firm in 1996, bringing with her 19 years of industry experience. Previously, she was a trader with Caxton Corporation (1995); vice president and head trader with Chesapeake Partners Management Company (1993-1995); vice president with UBS Securities, Inc. (1991-1993); vice president with Dillon, Read & Co. (1986-1991); vice president and head of trading with Avatar Associates (1982-1985), and a trader with Soros Fund Management (1978-1981). Donna earned a B.A. in History and Political Science from Wellesley College.