On May 27, 2020, ClearBridge Investments launched ClearBridge Focus Value ETF (CFCV), one of the first active, non-transparent ETFs launched under the so-called Precidian protocol.
Precidian Investments, like ClearBridge, is an affiliate of Legg Mason. Legg paid $25 million in January 2020 to acquire the majority ownership of Precidian. It had been a minority owner since 2016. Precidian received approval from the SEC for a process that allows fund managers to evade the traditional ETF rule requiring constant, real-time portfolio transparency. Precidian now licenses its “technologies” to other advisers, allowing them to offer active funds with limited portfolio visibility.
ClearBridge Investments, a 50-year-old firm, manages $120 billion in assets. It merged in 2013 with Legg Mason Capital Management. Each of Legg’s nine affiliates managers – including Royce and Brandywine – maintains its investment autonomy while Legg handles marketing and distribution.
Sometime in the third quarter of 2020, Franklin Resources will complete the $4.5 billion purchase of the whole lot of them.
ClearBridge Focus Value ETF is managed by Robert Feitler and Dmitry Khaykin. Feitler and Khaykin also manage ClearBridge Large Cap Value Fund (SINAX). The Focus Value ETF uses the same discipline as the Large Cap Value Fund but plans to hold fewer stocks, 30-40 versus the 50+ typically in the fund. Otherwise, they are using the same investment strategy:
The investable universe is companies, primarily domestic, with a market cap above $5 billion.
They filter for characteristics such as sustainable competitive advantages, sustainable characteristics and attractive valuations.
They combine stock-by-stock fundamental analysis with a broader macro analysis that focuses on broad economic and industry trends.
Finally, they apply a series of ongoing risk management strategies including a sell discipline, and risk controls to help mitigate concentration risk and enhance diversification.
Why buy the strategy?
Morningstar rates the low IS share class (LMLSX) as a four-star fund with a Silver medalist rating.
Mr. Feitler has been managing the fund since August 2004, just over 15 years. Mr. Khaykin joined in 2007. Morningstar credits the team with a 15-year record that’s about 0.54% greater than its peers and 0.17% above its benchmark index.
The fund is in the top tier of US large-cap value offering over the 15 years since Mr. Feitler joined. Its returns are in the top 20 of its category and its Sharpe ratio is in the top 15. We sorted LCV funds by their 15-year returns, then captured ClearBridge and its immediate neighbors.
| Name | APR | MAXDD | STDEV | Ulcer Index | Sharpe Ratio | Martin Ratio | MFO Rating | ER |
| Vanguard Value Index VIVAX | 6.9 | -54.9 | 15.1 | 15.8 | 0.37 | 0.36 | 3 | 0.17 |
| ClearBridge Large Cap Value SAIFX | 6.8 | -49.3 | 14.3 | 13.4 | 0.39 | 0.42 | 4 | 0.6 |
| Dodge & Cox Stock DODGX | 6.6 | -59.2 | 17.5 | 17.8 | 0.31 | 0.3 | 2 | 0.52 |
| Vanguard Windsor II VWNFX | 6.6 | -53.3 | 15.4 | 15 | 0.35 | 0.35 | 3 | 0.34 |
| Average of Metrics for Large-Cap Value | 6.1 | -52.6 | 15.6 | 15.1 | 0.32 | 0.34 | 3 | 0.78 |
ClearBridge outperformed Dodge & Cox Stock and Vanguard Windsor II in raw returns while trailing the Vanguard Value Index by 0.1%. When we shift our attention to risks and risk-return metrics, ClearBridge outperforms all three, and its peer averages, by a substantial margin. Its maximum drawdown, in February 2009, was 10 points small that Dodge & Cox’s and four points better than either of the Vanguard funds. It has lower volatility and higher risk-return measures than any of its neighbors.
It is, in short, a sensible, well-executed strategy that has a record of handing downturns well, including a substantial outperformance in 2020.
Why buy the strategic in a new-fangled wrapper instead of the mutual fund?
It is cheaper than the fund.
The ETF charges 50 bps, while the retail “A” shares go for 88 bps, an upcharge of 57%. Even the institutional IS shares, the cheapest current route, charge 55 bps (or 0.55% of assets annually). At 50 bps, the ETF will be cheaper than the $60 billion DODGX.
It is more tax-efficient than the fund.
If you own shares of an open-end mutual fund, you’re liable to receive a tax bill even in years when you don’t sell any of your shares; that’s because the fund structure forces them to pass along the capital gains taxes generated by the manager’s ongoing buying and selling. Sometimes the manager is choosing to sell, sometimes they’re forced to sell in order to meet redemptions. That generates ongoing and somewhat annoying tax bills.
An arcane element of the structure of ETFs – the creation unit – allows them to dodge the need to make taxable sales in order to meet redemptions. Morningstar’s rough estimation is that an active ETF is about 3% more tax-efficient than a comparable fund.
In addition, with an ETF, you only pay capital gains taxes in the year that you choose to sell your shares. That gives you greater control and a smaller set of accounting headaches.
In either structure, you pay taxes on any dividends you received each year.
It is less annoying than Legg Mason’s usual foolishness.
ClearBridge Large Cap Value Fund is marketed in seven different share classes, with sales loads ranging from 0% – 5.75%, expense ratios ranging from 0.55% to 1.58% and minimum investment requirements of $1,000 or $1 million.
ClearBridge might be the tip of the spear, the third active, non-transparent ETF to market but 14 other fund families – including Fidelity and T. Rowe Price – have pursued the option to launch such ETFs.
On its own, it’s an attractive option for conservative equity investors and, especially, those with a preference for incorporating sustainability principles in their portfolio. The clean format – no investment minimum, no 12b1 fees, no sales charges, low expense ratio – make it an especially intriguing option.
Investors might read the ETF’s homepage, which is a bit thin yet, or the fund’s homepage at Legg Mason, but ClearBridge’s own site offers a much more substantial discussion of the underlying ethos and strategy.
