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Traditional Large Cap Value Equity |
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At a Glance
- Primary Benchmark: Russell 1000® Value Index.
- Universe: U.S.-listed large- and mid-capitalization equity securities with low market valuations.
- We seek to invest in decent businesses that are out of favor. An important element of our process is the separation of deservedly cheap stocks from those with sufficient catalysts to recover.
- We care very much about catalysts, balance sheets, free cash flows, and investors' expectations.
- We do not worry about pundits' picks, near-term outlooks, earnings-per-share estimates, or earnings variability.
Objective
We seek to provide investors with excellent risk-adjusted long-term performance relative to the Russell 1000 Value Index, while adhering to our value-based investment philosophy.Typical Investment Guidelines
| FACTOR | GUIDELINE | |
| Maximum Stock Weightings At Purchase | 5% | |
| Maximum Industry Weighting At Purchase | 20% | |
| Maximum Sector Weighting At Purchase | 35% | |
| Portfolios Remain Fully Invested At All Times | ||
Quantitative Analysis
To the universe of all U.S.-listed domestic equities, we apply market capitalization and current-valuation screens to identify stocks with:- Market capitalizations exceeding $950 million;
- P/E ratios that place them in the bottom 40% of all stocks, and
- P/B and P/CF ratios that place them in the bottom 25% of all stocks.
Fundamental Analysis
Through fundamental analysis, we seek to understand the reasons a stock is undervalued or out-of-favor and to identify those companies most likely to return to normal valuation levels and profitability. Conclusions are based on a company's position in the earnings cycle, as well as its financial condition, competitive position, and management. In addition, we focus on long-term and cyclical industry trends in order to identify and measure the risks associated with a company's business. The 45-55 value stocks held in portfolios are chosen as a result of this in-depth analysis.Sell Disciplines
Stocks are typically sold under three scenarios:- Valuation is no longer low. When a stock returns to a “normal” valuation level it is no longer undervalued and is sold.
- Financial deterioration or failure of catalysts. A meaningful worsening of a company's financial health is grounds for sale. The catalysts identified for each company are closely monitored, and if at any point they are found to be implausible, the stock is sold.
- Better opportunities. A more compelling valuation arises and a stock can be sold as a source of funds.
Representative Portfolio Characteristics (as of 6/30/2008)*
| CHARACTERISTICS | BRANDYWINE | R1000V |
| Price/Earnings | 13.3 | 12.6 |
| Price/Book | 1.7 | 1.7 |
| Price/Cash Flow | 7.5 | 7.6 |
| Dividend Yield (%) | 2.1 | 3.1 |
| Avg. Market Cap ($B) | 75.8 | 92.3 |
| Holdings | 48 | 662 |
| Turnover (% last 12 months) | 40.4 | - |
Top Ten Holdings (as of 6/30/2008)*
| COMPANY | WEIGHT (%) | COMPANY | WEIGHT (%) |
| Wal-Mart Stores | 5.6 | Seagate Technology | 3.6 |
| ConocoPhillips | 4.1 | Comcast | 3.2 |
| Tidewater | 4.0 | Southwest Airlines | 3.2 |
| IBM | 3.9 | Goldman Sachs | 2.5 |
| Toyota Motor | 3.7 | JPMorgan Chase & Co | 2.4 |
* 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)
Performance in the portfolio was led by Energy as oil prices reached record highs during the quarter. Relative to the benchmark, our underweight in the Financials and stock selection in the Industrials provided much of the outperformance. The impact of the Financials weighed heavily on the portfolio despite outperforming the benchmark. Financial stocks suffered another quarter of pain as additional write-downs and charges pushed the group lower. We have benefited by being somewhat underweight this severely weak sector and are quite cognizant of the need to understand that what might appear to be undervalued may rank quite differently after asset write-downs. Consumer staples pulled back led by weakness in the shares of two of our food producers. On a relative basis, Information Technology negatively affected performance due to weakness in shares of a significant holding in the mobile telecommunications space.
Despite all that has happened - particularly the oil and gasoline spikes - and despite the length of the credit crunch - just about a year now - the U.S. economy has not slid into recession. Like a boxer who absorbs blow after blow and somehow remains standing, this resilience is, in and of itself, the economy's most positive feature. We remind investors that market timing (e.g. reducing stock exposure when the current news argues for it) is normally a counterproductive exercise. The message, in short, is to hang in there during this tough period because, although we don't know when, we will come out of it.
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 | SUPPLEMENTAL INFORMATION "PURE" GROSS | 3% NET | R1000V | S&P 500 | EXCESS GROSS RETURN |
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| R1000V | S&P 500 | |||||
| QTD | -3.99 | -4.71 | -5.31 | -2.73 | 1.32 | -1.26 |
| YTD | -10.53 | -11.87 | -13.57 | -11.91 | 3.04 | 1.38 |
| 1 Year | -19.27 | -21.67 | -18.78 | -13.12 | -0.49 | -6.15 |
| 3 Year | 4.71 | 1.66 | 3.53 | 4.41 | 1.18 | 0.30 |
| 5 Year | 9.73 | 6.55 | 8.92 | 7.58 | 0.81 | 2.15 |
| 7 Year | 5.99 | 2.91 | 4.73 | 2.45 | 1.26 | 3.54 |
| 10 Year | 6.60 | 3.50 | 4.92 | 2.88 | 1.68 | 3.72 |
| Since Inception** 7/1/1993 |
10.56 | 7.36 | 10.09 | 9.22 | 0.47 | 1.34 |
Calendar Year Composite Returns (as of 6/30/2008)
| YEAR | SUPPLEMENTAL INFORMATION "PURE" GROSS | 3% NET | R1000V | S&P 500 | # of ACCTS |
MARKET VALUE ($MM) |
FIRM ASSETS ($MM) |
STD. DEV. (%) |
| 2008 | -10.53 | -11.87 | -13.57 | -11.91 | 833 | 276 | 47,243 | 0.64 |
| 2007 | -2.12 | -4.98 | -0.17 | 5.49 | 878 | 322 | 49,208 | 0.57 |
| 2006 | 19.67 | 16.22 | 22.25 | 15.79 | 886 | 352 | 39,241 | 0.53 |
| 2005 | 10.29 | 7.09 | 7.07 | 4.91 | 765 | 311 | 26,332 | 0.43 |
| 2004 | 15.52 | 12.19 | 16.49 | 10.88 | 626 | 249 | 18,547 | 0.79 |
| 2003 | 37.82 | 33.90 | 30.03 | 28.69 | 434 | 187 | 12,680 | 1.06 |
| 2002 | -17.81 | -20.25 | -15.52 | -22.10 | 392 | 123 | 7,990 | 0.62 |
| 2001 | 0.95 | -2.00 | -5.59 | -11.88 | 287 | 129 | 7,772 | 1.28 |
| 2000 | 16.30 | 12.94 | 7.01 | -9.11 | 227 | 133 | 6,683 | 1.90 |
| 1999 | 6.55 | 3.45 | 7.35 | 21.04 | 254 | 141 | 6,583 | 1.19 |
| 1998 | 13.11 | 9.84 | 15.63 | 28.58 | 269 | 164 | 7,327 | 1.16 |
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, 2005, 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. Composite Description: Traditional Large Cap Value Equity (All Wrap) Composite (the "Composite") Inception date is July 1, 1993. The Creation date is January 15, 2002. The Composite includes all fully-discretionary, private client portfolios engaged through wrap-sponsor programs and invested in the Traditional Large Cap Value Equity strategy (the "Strategy"). The Strategy uses quantitative analysis to screen 100 - 150 stocks from the universe of all U.S.-listed stocks that meet targeted market capitalization and current-valuation ratios (P/E, P/B, and P/CF). Portfolios are constructed with 45 - 55 stocks further selected through additional fundamental analysis that focuses on a company's position in the earnings cycle, as well as its financial condition, competitive position, and management. The strategy focuses on long-term and cyclical industry trends in order to identify and measure the risks associated with a company's business. 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 S&P 500 is designed to capture the returns of many different sectors of the U.S. economy. Performance Calculation: 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 returns. "Pure" gross returns do not reflect the deduction of any fees, transaction costs, or expenses and are presented only as supplemental information to net returns. Net returns reflect the deduction of a hypothetical 3% "wrap" fee which includes a comprehensive brokerage, custodial, and advisory service fee. Wrap fees, and fees in lieu of commissions, vary across brokerage firms and accounts based upon account size and other factors. 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. Preliminary data, if so noted, reflects unreconciled data for the most recent reporting period. The number of accounts and market values are as of the end of the 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. As a result of our internal review process during the quarter ended September 30, 2007, the performance results shown reflect certain immaterial revisions to performance information previously reported by the Firm for periods through June 30, 2007. Fee Schedule: Brandywine Global offers investment advisory services on a discretionary basis to the clients of introducing financial consultants or broker-dealers (Sponsors). In these instances, the client enters into an agreement with Brandywine and the Sponsors or enters into an agreement solely with the Sponsor. The client portfolios are charged Comprehensive Wrap fees, which vary by sponsor and include brokerage, custodial and investment management fees. Due to the difficulty in separating these fees, an industry standard of 3% annual fee is applied to calculate the Composite net returns. Minimum initial investment: $100 thousand. Additional information on the Firm's fee schedule can be found in Form ADV Part II which is available upon request.
Portfolio Team
Scott L. Kuensell, CFA
Managing Director & Portfolio Manager
Scott serves as lead portfolio manager for Brandywine Global's Traditional Large Cap Value Equity strategy and is responsible for research coverage of the aerospace/defense, automotive, packaged goods, and retail sectors, contributing insights and stock recommendations to all of the firm's Large Cap Value Equity strategies. He joined the firm in 1995, bringing with him 17 years of industry experience. Previously, Scott was director of institutional equity sales and manager of Schroder, Wertheim and Company, Inc.'s Philadelphia office (1979-1995). He is a CFA charterholder and earned an A.B. in Psychology from Princeton University.
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.