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wealthtrack #1015- 10/4/13[music] [music] consuelo mack: this week on wealthtrack, clearbridgeaggressive growth fund manager richard freeman has been on the fast track for 30 years withno signs of slowing down. where is this great investor driving the portfolio now? that'snext on consuelo mack wealthtrack. sponsor: new york life along with mainstaysfamily of mutual funds, offers investment and retirement solutions so you can help yourclients "keep good going." sponsor: additional funding provided by:loomis-sayles - investors seeking the exceptional opportunities globally.the wintergreen fund - your home for global
value....and rosiland p. walter hello and welcome to this edition of wealthtrack,i'm consuelo mack. where do you come out in the classic, wall street "growth versus value"debate? when you look at your portfolio are there more value or growth stocks and funds?what's the difference between the two categories? traditionally growth stocks are defined ashaving higher than average earnings and sales as well as price/earnings multiples. typicallythey pay little or no dividend. value stocks are supposed to have slower growth and lowerp/e multiples but pay higher dividends. growth stocks typically perform better in bull markets.as you can see from this chart, they certainly have since the market bottomed in march of2009. a benchmark russell growth index has
vastly outperformed the value index. value stocks are supposed to protect you morein bear markets. as a general rule they have. but in the great equalizer market of the 2008-2009financial crisis, both classes were hit hard. warren buffett would tell you growth and valueare meaningless distinctions. here's how he put it in his 1992 berkshire hathaway chairman'sletter: "in our opinion, the two approaches are joined at the hip: growth is always acomponent in the calculation of value, constituting a variable whose importance can range fromnegligible to enormous and whose impact can be negative as well as positive". this week's wealthtrack guest could not agreemore. he is richard freeman, a founding co-portfolio
manager of the clearbridge aggressive growthfund which he now co-manages with evan bauman. the fund is celebrating its 30th anniversarythis year and has outperformed the market and its peers in the large growth categoryover the last decade. freeman has also been nominated twice for morningstar's stock fundmanager of the year award. i began our conversation by asking freeman why in retrospect he thinksthe fund should never have been labeled "aggressive growth." richie freeman: we started it as the shearsonaggressive growth fund back in 1983, and it's not managed in an aggressive manner. i thinkit scared off a lot of people when they heard the word "aggressive." it had negative connotations-rapid turnover, buying very risky stocks.
if we could turn back the clock, which youcan't do, it probably should have been the shearson growth fund. we've been asked veryoften why don't you change the name of the fund? i think after 30 years it has an identity.people realized the clearbridge aggressive growth fund is what it is. it should havebeen called the passive-aggressive growth fund. consuelo mack: okay. passive-aggressive. richie freeman: that's what it should havebeen. consuelo mack: why passive... what's passiveabout it? richie freeman: the management style... ifyou look at the companies, they clearly could
be called aggressive companies. they're stateof the art. they're lifesaving companies, companies that have products that can serveunmet needs, managed aggressively, but the way we manage the portfolio, we don't havea lot of turnover. consuelo mack: right. 8%, where your growthcompetitors... richie freeman: yes. consuelo mack:...the annual turnover is 96%.so that's incredible. richie freeman: that's the passive part ofit. consuelo mack: right. richie freeman: i mean we're not reticentto change the portfolio, but give us something
that we like more than what we have in theportfolio. and this has really been constant over the 30 years of the fund. consuelo mack: so what is your mission atthe clearbridge aggressive growth fund? if i'm looking at you and i'm saying, you know,should i invest with richie freeman and evan bauman, you know, what is it that i'm goingto get from you? richie freeman: the only mission that we haveis to try to deliver good absolute returns over time. there's a big preoccupation onthe street with relative returns, benchmark investing. we're benchmark agnostic. we couldcare less what's in the benchmarks. consuelo mack: so you don't care what's inthe russell 3000.
richie freeman: no. consuelo mack: you're not comparing your performanceto that. richie freeman: well, we do. you have to becompared to something. that's the report card, but we're not going to set up the portfoliolooking to see what's in the russell. i guess the top ten holdings in the russell, we ownnone of them. i mean evan reminded me that our active share, which is the amount that'snot in the benchmark, is 95%, which is said to be very, very high. so over time, if youhave good absolute returns, the relative returns take care of themselves. consuelo mack: and let's talk about what you'relooking for, what you mean by absolute returns.
richie freeman: absolute return is if we'reup 10%, and the market is up 11%, we're not going to be apologizing for trailing the marketby 1%. if we're down five percent, and the market is down ten percent, we're not goingto be happy, even though it's "good relative numbers," because you've lost principal. overtime, we want to try to put up very strong absolute return, just to give the investora good return. i've always said, you know, from when we startedit, we manage money for a hypothetical woman that lives in iowa, a 75-year-old woman, neverheard of the dow jones average, never heard of the russell, maybe heard of the s&p. allshe wants to do is get a good return on her account. and she doesn't want to be told,"you had a good year. you lost less than the
'market.'" she just wants to have a good returnthat she could use. i don't mind if people take some of the money out that they've madeover the years. they should be able to use and enjoy some of the proceeds. consuelo mack: so 1983, how did this happen?because you were an analyst. richie freeman: i guess it was may of 1983,a very good friend of mine, elliot fried, who was the research director at shearson,met him in 1976, he was a great friend. he's a wall street legend, called me in may of1983 that shearson would be launching the shearson aggressive growth fund, would i beinterested in managing it with him. and i've always wanted to manage money at the time.i think most analysts always desire... the
goal is always to manage money. and it wasthe easiest phone call i ever had. consuelo mack: i'm just thinking of when ilook at the profile of the fund, you know, we talked about the fact that it is a verylow turnover. but the other thing that is really unusual about the fund is that it'sso concentrated. i mean you've got what? half of the fund is in the top ten holdings. 35%is in the top five. a third of the fund is in healthcare right now. 20% is in technology.you know, why are you running such a highly concentrated portfolio? richie freeman: when a lot of those companiesstarted out in the portfolio, they were very, very small. they were microcaps. idec pharmaceuticals,in 1991, was a microcap name.
consuelo mack: and it's now biogen idec. richie freeman: now, it's biogen idec. consuelo mack: it's now, what, 11% of yourportfolio? so tell us the story of... and this is kind of the story of how you investas well. of how it happened that it's now 11% of the fund. richie freeman: i think it's emblematic ofhow we look at companies. the ceo of idec had come out of genentech. genentech was thefirst stock that we ever bought, october 24th of 1983. so i saw bill rastetter was overat idec pharmaceuticals. we looked at it. we liked the product that they were involvedin. it turned out that the initial product
of theirs failed. they then teamed up withgenentech to design clinical trials on rituxan, as it turned out, which is a blockbuster drug.we bought the bulk of our stock in 1995, because it had the characteristics of what we like.they were serving a medical need. it could really make a difference in people. the company can serve a very large market,a top-tier management team, backed by a very, very strong partnership in genentech. andin retrospect, we got awfully lucky, because they merged with biogen in the early 2000s.and it's been a very, very fortunate stock. but then, again, it has the characteristics,not just in healthcare, but be an oil company like anadarko, or a cable company like comcast.
consuelo mack: right. again, these are yourtop five holdings. richie freeman: it throws off a lot of freecash flow. i don't understand why any investor would make an investment if he didn't thinkover time the company would not generate cash, because that's what you're left with. at theend of the day, you want companies to generate cash, and the biotech companies had that ability.not early on, when they were consumers of capital, but over time, they've been enormousgenerators of cash. consuelo mack: but what i don't get, richie,is that you've held these stocks, as you said, some of them since the 1980s, some since the1990s, but you've ridden these stocks up and down. so, you know, what happens when you'rein the midst of like a financial crisis, or
the crash of '87, and you're holding thesecompanies? and i know you've gotten, i'm sure, flak from your investors in saying, you know,what are you doing, freeman? you know, the stock is down x percent. what do you do ina situation like that? richie freeman: i heard it very often frommy wife in 2008, in fact. if you look at the market over time, you understand the marketis going to fluctuate. i mean joe granville always said, "stocks are like people. theyhave to breathe." and as long as you have a sign curve in an upward direction, thatshould be the goal, but there are going to be periods of time when you're going to behit with unexpected negative news. call it headline risk.
we owned a company, chiron, a biotech company,which singlehandedly, in retrospect, caused the flu vaccine shortage about seven yearsago. a plant that manufactured the vaccine for them was contaminated in london, had topull the supplies, shut down the ... essentially cut off a lot of the flu vaccine in the u.s.the stock plummeted. a lot of investors worried. we looked at what the company was worth, exingout the flu business, and we thought that the valuation was incredibly compelling, andadded to it. luckily then, novartis came along and acquired them a couple of years later. biogen idec, which we mentioned, is anothercompany that's been through headline risk. they had a drug, which they voluntarily pulledoff the market six years ago, because it had
some side effects. it was then put back onthe market. the stock had fallen to a level which we think removed any value for thatdrug, and the company has gone on to make all-time highs. anadarko petroleum, anotherheadline risk company, they had a 25% investment in the macondo well, which they were right,there was a lot of oil in that well, except it was flowing into the ocean, as opposedto into the pipes. the stock fell precipitously. we took a look at what the valuation of anadarkowould be under a worst-case scenario, and we thought that the valuation was more thanbeing discounted by the stock price coming down. so we held onto anadarko, and it's comeback and made all-time highs. consuelo mack: so let me ask you about, whenyou're talking about headline risk, you're
sounding like a value investor to me, likea deep value investor. so when you have headline risk and the stock goes down, do you buy up,do you double up, or do you just hold it? i mean what's your strategy? richie freeman: well, the one thing that agrowth investor hates is when his stock becomes a devalued stock. consuelo mack: exactly. richie freeman: right. but you have to lookat it, after the news is out, you have to take a look at reevaluate it. what is it worthtoday, with all the information that's out there? wall street is very emotional. wallstreet tends to over discount events, and
tries to over... when things are going good,they'll always overshoot, and vice-versa on the downside. so we try to become unemotional,in a very emotional business, and we try to make the best judgment where this companyis going to be, you know, two to three years out. consuelo mack: according to morningstar yourrisk profile is high on the fund. the fund captured 109% of the russell growth indexin the upside, in the last decade, but it also suffered 112% of decline. so is volatility,that's just the name of the game with a growth fund? how do you explain that? richie freeman: volatility is just a byproduct.it's nothing that we're going to control.
what we care about at the end of the day ofthe companies, and if we're able to put up strong numbers, we've been very, very fortunate,we try to buy great companies. great companies, over time, will become great stocks. a lotof people buy great stocks thinking that they're great companies, and it doesn't work thatway. i mean a great example is facebook. you know, we thought that eventually this couldbe a great company. we thought it was a great company when they came public. consuelo mack: let me stop you there. so tellme about why you decided to buy facebook. and you bought it at the ipo, is that right? richie freeman: we bought 100,000 shares atthe ipo, at 38.
consuelo mack: all right. initial public offering,right. richie freeman: yes. we thought that at overa billion users, we thought it was a sticky product. we didn't think it was a fad. wethought it was a powerful trend. you contrast that with myspace, from a number of yearsago. we liked the management team. the cfo of the company has been in our office whenhe was with genentech. he was the cfo of genentech. and the ipo, in retrospect, was an enormouslysuccessful ipo. when people hear that, they say, "how are you saying that? the stock pricedeclined." well, it was very successful for the company, not so much for the people thatbought it at 38. then, unfortunately, many of them sold it lower.
consuelo mack: including you, who bought it... richie freeman: yeah. that's right. consuelo mack: ... at the initial public offeringprice. richie freeman: guilty, as charged. richie freeman: but, for us, that was a smallposition. we have a number of positions, maybe 20 positions, that are going to be very small,relatively small in the portfolio. we'll call it the bullpen, where by putting it in theportfolio, we will watch them much more closely. either we can sell it, if we don't like what'sdeveloping, or we can build it into a bigger position, if the price is right, and if wesee certain things happening. the lockup ended.
many of the insiders were selling at ... consuelo mack: and didn't that distress youat all? i mean isn't that a sign that you should be getting out, too, if they're bailingout? richie freeman: we actually welcomed it, inthat sense ... consuelo mack: really? richie freeman: ... because our work toldus that they weren't losing any share. they thought there was a chance that wall streetwas looking at this company incorrectly. target advertising is an explosive area, and it wasn'tbeing looked at correctly. we bought probably 2-and-a-half million more shares. our costbasis is about 24. so in retrospect, it's
been a lucky holding, because we never thoughtit would rally back as fast as it did. but that's an example of headline risk. headlinesare good for selling newspapers, not for making money on the stock market. consuelo mack: so in the bullpen, which ilove that concept, i mean how many stocks do you have in the bullpen that you have smallpositions in, and you're... richie freeman: small position defined isprobably 40 basis points, 50 basis points. we have, you know, a dozen or so, but they'resmall. we usually don't talk about... consuelo mack: you mean just a half a percentageof the portfolio? is that ... richie freeman: well, now facebook is probablya little under 2%, but it was very small when
we first bought it, because we weren't goingto bet the ranch at that price. consuelo mack: so in the bullpen, i mean arethere any stocks that are relatively new holdings that you think that with confidence that ifthings go the way you think they're going to go that they'll be in the portfolio in10 years, or in 20 years? richie freeman: we hope so. consuelo mack: all right. richie freeman: we don't know. we don't knowthings are going to be developing, but if we see the things ... if we feel more comfortable,and it's not being reflected in the stock price, you know, we'll add to them. that'swhat we did with genzyme, which we first bought
back in 1989. i remember doing it with amgeneral, so in the 1980s. they started out as small positions, but certain things developed.the stock prices didn't skyrocket before we added to them, and, you know, we got lucky. consuelo mack: right. you know, biotech, bigholdings of yours. united healthcare is a big holding. so explain the united healthcarestory. i guess it's what, number two? richie freeman: yeah. consuelo mack: your second largest holding.8% of the portfolio. richie freeman: bought u&h in 1991. it wasa premiere health company. we also owned u.s. healthcare at the time. we bought united healthcareand u.s. healthcare. u.s. healthcare was acquired
by aetna. united healthcare grew dramaticallythrough acquisition. it has all the characteristics of a company that we look for- great management,large addressable market, they throw off an enormous amount of cash. and they're shareholderfriendly. they return cash to us as dividends. i mean dividends never accounted for anythingin this fund. the yield was always nm, non-meaningful. u&h now pays almost an s&p kind of dividend.it's been raised significantly. and they've been buying back billions of dollars worthof stock, and the earnings per share have grown nicely. consuelo mack: so, again, this is a growthfund, and you own united healthcare. so, you know, at what point does... you know, doesthat fit your growth profile?
richie freeman: to me, a growth stock is astock that goes up, period. that's the goal. people always, they try to make the distinction,as you said, between growth and value. a growth stock is one that we think could advance inprice. people always try to pitch it all the same, what criteria to use, it has to sellat under 20 times earnings, more than 30 times earnings. we like to buy them if they're sellingat ... ideally, if you can buy a company at less than its growth rate, that's throwingoff so much cash that they can buy back stock, pay you a dividend, invest in other companies,and grow that way, that's the triple play. that's the homerun. consuelo mack: so when do you sell a stock?do you sell stocks?
richie freeman: well, we have a turnover,so 8%... consuelo mack: i know you do 8% a year, right. richie freeman: we have a lot of involuntaryturnovers, when you have takeovers. and you mentioned the biotech area, we've had ... manyof those companies have been part of our turnover over the years. genentech was acquired. chiron.gensyme. imclone was acquired. millennium pharmaceuticals. we had gen-probe, that hadbeen acquired. genentech, itself, as i said, was acquired. consuelo mack: right. and, of course, thosewere all positives, because when a company is acquired, they're usually acquired at apremium.
richie freeman: and those are always surprises,you know. i'm always the most surprised guy when that happens. and also, when names getto be too large a portion of the portfolio, we will trim them down. consuelo mack: so i'm just looking, and sobiogen idec at 11% is not too big... richie freeman: it's been trimmed ... consuelo mack: it has. richie freeman: we have sold over the years,you know, quite a bit of that stock, because it's up dramatically, to try to keep it atroughly the 10% area. we had taken some off the table. anadarko petroleum. genentech.years ago, we sold a lot, when it was over
that 10% level. u&h, as well, was over tenpercent. we trimmed it down. and there are other instances where we'll sell a stock,if we think the risk reward is poor. we had oracle. we bought oracle and lotus the sameday in 1991. lotus was acquired by ibm in mid-1990s. oracle, we started selling in 1998,and sold the rest of it in 1999. consuelo mack: based on? richie freeman: based on just purely on valuation.just felt that if they would ever miss earnings, and we had no reason to believe that theywould, if they would ever miss earnings by a couple of pennies, the stock, based on itsvaluation, would suffer dramatically. so i remember after selling oracle, the stock probablydoubled in the next year, before going down
80% after that, and the dot.com breakdownof 2000 and 2001. consuelo mack: biggest investment mistakeyou've made in the portfolio? richie freeman: there's only a half-hour. consuelo mack: or in life. richie freeman: this is only a half-hour show,isn't it? consuelo mack: but is there one big mistakethat you made that you really learned a lesson? richie freeman: in the year 2000, i thinkthe fund was up a little over 19%, but we were up ... consuelo mack: one-nine or nine ...
richie freeman: 19. 19%. consuelo mack: 19, right. richie freeman: at one time, i think we wereup over 30% that year, and gave back some. even though it looks greedy, you're up a lotin a down year for the market, it still, to this day, bothers me that i didn't take moreoff the table. consuelo mack: you've been through booms andbusts. you've been through the '87 crash. you've been through the great recession, thefinancial crisis, whatever. so what's changed in how you invest? has anything changed? imean how have you adapted to these various ...
richie freeman: i think the biggest differenceis when you speak to companies, they're not as helpful as they were back before the adventof full disclosure. so you just have to find other ways to invest. i mean you can't callup the ir person and expect to find out what the orders are every month, because that'snot legal. so, obviously, it's not done now. you didn't have computers back then, whereeverybody had access to the internet. if you wanted to do research on a company, you hadto call up the company to get the annual report sent to you. now you can just go to your computer,get all the information. companies, when they put out events, will put out a conferencecall, so everybody at the same time has access at the exact same moment.
consuelo mack: so the competitive advantagethat one used to have, if you had big holdings, or whatever, is gone. richie freeman: but we still find ways todo okay. because at the end of the day it comes down to how do you value companies,period, and that hasn't changed. and i think one of the negatives that's happening nowversus years ago, i think the public almost feels that they're compelled, from watchinga lot of shows, and not this one, and that's why i like this one, they're almost compelledthe public to make trades. what are you doing today? how are you trading the market overthe next couple of weeks? how are you going to react to the budget deficit? to me, that'snot the way to make money for the long term.
you try to identify great companies. you monitorthem closely. you increase your positions, if the market accommodates you, gives yousome weakness. you cut back into extreme strength. and don't be scared out of positions by alot of macro events. consuelo mack: so during the financial crisisitself, which, you know, was kind of a near-death experience for many portfolio managers, andcertainly, you know, you suffered as well, is there anything that you're doing differentlyas a result of what happened in the financial crisis? richie freeman: i would say no. and the onlyway you can really tell, you ask a manager did he change his portfolio, did he changewhat he did after the crisis, and he'll say
no. but then you ask for his turnover, andif his turnover changed appreciably, then you know he really did make some changes. our turnover didn't change afterwards, sosome of the stocks that clearly hurt us on the way down have been some of the biggestbeneficiaries in the portfolio. seagate got down to two-and-three-quarters, as did libertymedia, back then. liberty media went from 18 to two-and-three quarters. the john malonecompany. and, you know, we got lots of questions from clients. i mean how do you justify chargingus a fee when you have liberty media go from eighteen to two-and-three-quarters? you know,we held on to it. liberty media now is 145, not including distribution of stars entertainmentthat they gave us for another $27. i mean
that's an extreme example, but it's... ifwe would become more conservative afterwards, as a lot of people did, we wouldn't have hadthe benefit of the recovery. consuelo mack: one investment for a long-termdiversified portfolio. we always ask our guests this at the end of every wealthtrack. so whatwould you have us do, or what would you have us own, rich? richie freeman: hall of fame golfer, lee trevino,tells a story, which i think is applicable to this show. he said the most nerve wrackingthing is when you have a $10 putt with just $5 in your pocket. in other words, you betterbe perfect. when people run up a lot of debt, they have big mortgages, a lot of credit cards,that's okay as long as a lot of money is coming
in, there are no financial problems, but whathappens if, you know, something changes? so i've always told people debt is the dirtiestword in the financial business, dirtiest four-letter word. a lot of people don't agree with me, but iwill always say, even for younger people, if they're able to, pay down your mortgage,if you're getting money in. pay down your credit cards. try to remain as low debt asyou possibly can, because i think you can make better judgments if things do get rocky.so i feel very strongly about that. consuelo mack: relate that to your investmentmanagement approach. richie freeman: if you look at the holdingsin the portfolio, you look at the balance
sheets, you have companies like forest labs,with $12 a share in cash, no debt, you have biogen idec, that was able to make a $3 billionacquisition for cash this year, because they're throwing off billions of dollars of cash,with no debt. anadarko doubled their dividend. they generate a positive free cash flow. comcastwas able to buy the nbc universal venture, because they're throwing off so many billionsof dollars of cash flow. to me, cash is the most important thing. it's what every investorshould be striving for. why do you want to own companies that aredebt ridden, that are consistently worried about rolling over debt? you want to try tocontrol your destiny. now, there are going to be events like 2008 that will pressurea lot of companies, and if that's the case,
you want to have companies that, as best asthey can, can control their destiny. they don't want to be beholden to the person thatthey're rolling over money from, so that's how i feel. consuelo mack: great point. rich freeman,such a treat to have you on wealthtrack. it's the 30th anniversary of the clearbridge aggressivegrowth fund. we really appreciate having you here. richie freeman: love your show, consuelo. consuelo mack: at the close of every wealthtrackwe try to give you one suggestion to help you build and protect your wealth over thelong term. this week's action point is: don't
get hung up on investment labels. as we justheard from richie freeman the "aggressive growth" label on his fund, given 30 yearsago at its launch, is a misnomer and does not describe the nature of his fund whichseeks stocks that offer the best absolute returns over time. and unlike many other socalled "growth" funds freeman's portfolio has an extremely low turnover, not a characteristicof a typical aggressive growth portfolio. so your best bet is to know a fund's investmentobjectives and approach and if it has successfully achieved them over time. i hope you can join us next week. gluskinsheff's influential economist and strategist david rosenberg is reversing his 20 year deflationcall. he says we are entering a new era. he'll
tell us why, and what it means for investors.until then, please visit our website to see past wealthtrack episodes. additional interviewswith our guests and valuable research from our sources are available on wealthtrack extra.and feel free to connect with us on facebook and twitter. in the meantime, have a greatweekend and make the week ahead a profitable and a productive one.
