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Navigating U.S. equities through active management

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This is a sponsored article from Legg Mason.


“US equities have been rallying since the presidential election, driving major equity indexes such as the S&P 500 Index and the Russell 2000 Index to record highs.”

Cumulative Returns of S&P 500 Index and Russell 2000 Index

Source: Bloomberg, as at 28 February 2017. Returns are in US dollar terms. Past performance is not indicative of future performance.

The global financial environment is changing, driven in part by the Fed’s monetary policy moves and the Trump Administration’s potential changes to US fiscal policy. This may create opportunities to exploit inefficiencies – a cornerstone of all actively managed strategies, especially in sectors which might benefit from the pro-growth policies such as healthcare, infrastructure, defence, energy and financials.

Areas that lend themselves to potential outperformance through active management include:

High Active Share U.S. Equities
Funds with high active share are designed to be bolder and take on off-benchmark opportunities and risks. These fund managers typically implement very robust and structured investment processes. They generally have proven track records in building high-conviction, concentrated and low-turnover portfolios.

High active share funds have the potential to deliver higher returns, particularly when markets are volatile or falling. Aside from the alpha these managers deliver, given the historical highs at which US equity markets have been trading, a correction may be inevitable. Passive products have no ability to protect investors when there is a market drawdown.

Small Cap Equities
By size and nature, there are greater inefficiencies within small cap equities. This could offer active managers more opportunities to outperform, given higher levels of insider ownership, which tends to align management and investor interests.

The benefits of active management extend beyond performance. Active managers can screen for quality and use buy/sell triggers to reduce risk, investing only in the most attractive stocks. This is particularly important in small caps, which includes many illiquid, under-followed companies with greater price discrepancies.

Those who invest in the top quartile of actively managed funds can potentially benefit over time. The key is to find managers whose approach is truly distinct from the indexes and have demonstrated longer term expertise.

Percentage of Times Active Managers in Top Quartile Beat the Benchmark 2002 – 2016

Source: Morningstar and Legg Mason, as at 31 December 2016 for the period from 1 January 2002 to 31 December 2016. Based on rolling quarterly returns for US domiciled funds in the respective Morningstar categories. Large Cap Core vs. the S&P 500 Index; Small Cap Growth vs. the Russell 2000 Growth Index; Small Cap Core vs. the Russell 2000 Index; Small Cap Value vs. the Russell 2000 Value Index. Past performance is not indicative of future performance.

Active management can provide investors with enhanced capabilities and options that will help them continue to capture alpha, while offering protection from the downturn. Some managers may not beat the benchmark each year, but the best often outperform the market in difficult times. Now may be the time for investors to seek out and trust their portfolios to successful , well-chosen active managers.

To find out more about Legg Mason’s US Equities capabilities, please click on the links below:
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Important Information

Morningstar Performance Data: © 2017 Morningstar. All Rights Reserved. The information contained herein: (1) is proprietary to Morningstar and/or its content providers; (2) may not be copied or distributed; and (3) is not warranted to be accurate, complete or timely. Neither Morningstar nor its content providers are responsible for any damages or losses arising from any use of this information. Past performance is no guarantee of future results.

Source: Legg Mason. This document is issued by Legg Mason Asset Management Hong Kong Limited in Hong Kong and by Legg Mason Asset Management Singapore Pte. Limited in Singapore (“Legg Mason”). This document is for information only and does not constitute an offer or invitation to the public to purchase any shares in any fund in Hong Kong or Singapore.

This document is for information only and is not intended to provide investment advice. All data, opinions, estimates and other information are provided as of the date of this document and may be subject to change without notice. Where past performance is quoted, such figures are not indicative of future performance. Investors intending to subscribe for any units or shares of a fund should refer to the Fund’s most current offering document. INVESTMENT INVOLVES RISKS. Please refer to the offering documents for further details, including the risk factors. Although information has been obtained from sources that Legg Mason believes to be reliable, no guarantee can be given as to its accuracy and such information may be incomplete or condensed and may be subject to change at any time without notice.

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Issuer in Hong Kong:
Legg Mason Asset Management Hong Kong Limited.

Issuer in Singapore:
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This is a sponsored article from Legg Mason.

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