BOSTON What do you do with $1 billion in extra cash? For Evan Bauman, one of America’s top performing fund managers, the answer is simple: nothing for now.
"The broad market is not cheap anymore,” Bauman, co-manager of the ClearBridge Aggressive Growth Fund said, referring to a stock market that has hit several record highs in recent months, and which the Federal Reserve warned last week was overvalued in parts.
Instead, Bauman is keeping his current portfolio, one that has earned him double-digit growth and a ten-digit cash stockpile - and which he says is built for the long run.
The top holding in Bauman’s $11.7 billion fund is Biogen Idec Inc, which he says is distinct from smaller companies that may have traded too high because of its broad drug portfolio and strong revenue growth. Biogen produces treatments such as for multiple sclerosis and hemophilia.
Bauman said his second-largest holding at June 30, UnitedHealth Group Inc, has advantages like a broad national footprint, allowing it to grow despite cost pressures from federal healthcare reforms.
Bauman said he avoids consumer companies like restaurant chains and retailers, which he considers too expensive because their performance is tied to the slow-growing economy. Among social media companies he holds only Facebook Inc, and worries others could quickly face competition, or, as he put it in economic lingo, that "barriers to entry" are low in the space.
"It's prudent to remain conservative," Bauman said. He expects he will invest the sidelined cash when market volatility brings down prices.
Bauman and co-manager Richard Freeman have an annual turnover rate averaging just 3 percent since 2009, the lowest of all 664 growth funds tracked by Thomson Reuters' Lipper unit.
Bauman credits ClearBridge's 25 analysts with creating an unusual portfolio. For instance it has never owned Apple Inc or Netflix Inc, which Bauman says depend too much on the whims of fickle consumers.
For 2014 through July 18, Aggressive Growth was up 12 percent, better than 99 percent of its peers, according to Morningstar. The fund holds the same top rank over the past three and five years, according to Morningstar.
Investors have turned away from active funds like aggressive growth lately in favor of index products. But it is tough to argue that Bauman and Freeman are just lucky, said Jeff Tjornehoj, Lipper's head of research.
"These guys make brilliant calls over time," Tjornehoj said. "They don't beat the index every year, but when they underperform they don't dig a deep hole."
Bauman, 39, joined what became ClearBridge as an intern in 1996. Strong inflows to ClearBridge, of New York, have been a bright spot for parent Legg Mason Inc, and led to Bauman's cash buildup.
The fund has also benefited from takeovers. The fund's third-biggest position, specialty pharmaceutical maker Forest Laboratories Inc, was just bought by generic drugmaker Actavis PLC. Bauman said he will likely continue to own Actavis, carrying on tradition: Forest was the fund's oldest stock, first bought in 1983.
(Reporting by Ross Kerber; Editing by Richard Valdmanis, Bernard Orr)