e-fundresearch: Ms McLemore, You are the portfolio manager of the Legg Mason Capital Management Opportunity Fund (ISIN: IIE00B3FHN413). How long have you been responsible for the management of the portfolio?
McLemore: I have managed the Opportunity fund since it was launched in February 2009.
e-fundresearch: Which benchmark do you adhere to?
McLemore: We use the S&P 500 as a benchmark because we believe it broadly represents the US market.
e-fundresearch: Are you also responsible for other funds at the moment?
McLemore: I also serve as the Assistant Portfolio Manager on the US version of the fund, the Opportunity Trust and I am part of a team managing a newly launched, internally-funded income product, Income Opportunities.
e-fundresearch: What is the total volume that you manage in all your funds?
McLemore: There is approximately $2.0B in assets under management in the different products.
e-fundresearch: Regarding the performance: How has the fund performed since the beginning of the year and in the years 2004-2009? Absolutely and relative to the relevant benchmark?
McLemore: Through the end of May, Opportunity Fund was up 8.2% (gross performance) outperforming its benchmark, the S&P 500, -1.5% decline. From the time Opportunity Fund was launched in Feb 2009 through the end of that year, the fund gained 82.4% beating the S&P 500’s 36.9% gain over the same period.
e-fundresearch: How content are you with your own performance in the last years and this year?
McLemore: The fund has performed very well since its launch. Markets were in disarray in early 2009 so there were extremely compelling opportunities due to depressed valuations. We positioned the fund to benefit in a recovery in the markets and economy, which is exactly what it’s done. We tend to thrive in environments like the current one where there is plenty of evidence of improving conditions yet fear and pessimism remain quite elevated resulting in very attractive valuation opportunities so overall I am quite content.
e-fundresearch: How are you able to deliver added value for your investors with your performance?
McLemore: Our long-term, intrinsic value-based approach has proven itself effective over long time horizons. Now, we think investors can benefit from owning the fund due to its uniquely offensive positioning, which is rare given the current overwhelming risk aversion. In this environment, there continues to be really compelling values. The fund is currently focused on names that trade at the biggest discounts to long-term business values and should do the best as conditions continue to normalize.
e-fundresearch: How long have you been a portfolio manager?
McLemore: The Opportunity Fund, which was launched in Feb 2009, is the first fund for which I have sole responsibility so I am relatively new to portfolio management. I have worked as an Assistant Manager for the US-based Opportunity Trust for a few years. Prior to that, I worked as an analyst for our funds.
e-fundresearch: What are your biggest successes and your biggest disappointments in your career as fund manager?
McLemore: I have been doing this a relatively short time but I would say 2009 was the biggest success since we were a top performing fund but the reason behind that performance is more important: we adhered to our process of valuing businesses and focusing on the long-term when virtually no one else was. The other side of this, and the biggest disappointment was 2008 when we did very poorly. We were too optimistic and the environment deteriorated far more than we expected.
e-fundresearch: What kind of capital market situation do we have at the moment? How do you act in this environment?
McLemore: The current market environment is characterized by fear and uncertainty. At the lows, the US equity market posted its worst 10-year performance since the Great Depression causing investors to question the rationale for investing in equities. Fund flows have reached record levels in bonds while investors continue to redeem equities. Every market pullback causes investors to get even more fearful and pessimistic than the March 2009 lows. Currently, people question whether the market turmoil we’re experiencing is an instant replay of 2008. Unlike 2008 when conditions were broadly deteriorating, the current environment continues to broadly get better. The economy continues to grow and hiring is picking up. Corporations are in great shape with record cash balances, much improved balance sheets and profits that continue to beat expectations. The resulting combination of such positive corporate performance and such negative investor sentiment yields amazing valuation opportunities in the market. So this is the ideal environment for long-term stock pickers such as ourselves. Broadly, equities are undervalued and we can position the fund to earn very attractive returns over the long-term.
e-fundresearch: What are the special challenges in this environment?
McLemore: There are always many challenges in this business. One challenge we face currently is convincing investors of something that we have great confidence in: now is a great time to buy equities broadly and our funds specifically. The poor performance of equities over the past 10 years combined with the heightened current volatility have drained investor confidence in the equity markets. Investors tend to want to buy what has performed the best, which is why there were record flows into equity funds in 1999 and 2000 after they had done really well but when equities were expensive. Now, the reverse is true. Equities have done very poorly so expectations are low and valuations are extremely cheap, which is the perfect combination for future returns. Yet now, investors don’t want equities. We think of managing money as a profession where the number one objective is to add value for the client. It makes it more difficult to accomplish this objective when people focus on the past rather than the future.
There are of course many other investment challenges we encounter in this environment, which are too plentiful to discuss in much detail. People are traumatized by the financial crisis and Great Recession. Uncertainty is the highest its been in decades. On nearly every topic, there are people with diametrically opposed and well-informed views. To name only a few examples, people disagree on whether Inflation or deflation is a bigger risk, whether governments should pursue budget austerity or Keynesian-style fiscal stimulus and whether the European sovereign debt problems will be contained or not. So there are many challenges out there.
We think the best strategy is to remain focused on the underlying business values, which are the most attractive they’ve been in decades.
e-fundresearch: What objectives do you have till the end of the year and in the mid term for the upcoming 3 to 5 years?
McLemore: Our job is to add value for clients by outperforming the benchmark so that is what we attempt to do over the short, intermediate and long-term. We attempt to measure the upside in the fund by looking at what we think each individual holding is worth over a 3-5 year time horizon, and weighting it according to the position size in the portfolio. It is currently over 100%, the highest its been since the spring 2009 market low so the objective is to deliver on that return and to get more clients to benefit from it.
I recently did my first trip in Europe to launch the Opportunity fund. It was a whirlwind tour: 6 cities in 5 days. But I am very passionate about the fact that now is the time for people to buy the fund so my objective is get more investors involved before the market rebounds.
e-fundresearch: Do you model yourself on someone? Any ideals?
McLemore: I admire anyone who has been able to produce long-term results in this business as it is very difficult to do so. Obviously, my number one role-model is my boss and mentor, Bill Miller. He has proven himself a very skillful fund manager over very long periods of time delivering outperformance on a number of different products with a great degree of consistency. He meets all of Warren Buffett’s (another of my role models) criteria for what it takes to be successful: independent thinking, emotional stability and keen understanding of both institutional and human behavior. He has an intense focus on doing what’s best for the client, rather than what the client wants per se. Bill will go against the crowds if he believes its in the client’s best interest. A couple of great examples are withstanding immense pressure to buy energy stocks near their peak in the summer of 2008 and to sell out of financials near the lows in 2009. He makes mistakes, as everyone in this business does but I deeply admire how he is always looking for ways to improve the process and not make the same mistakes again. I have probably gone on too long in what may seem a self-serving vein since I work for him, but I work for him for exactly these reasons. I have many other people I admire for various reasons too, but this answer is probably sufficient for this purpose.
e-fundresearch: What motivates you in your job?
McLemore: I am motivated by helping people reach their financial objectives and knowing that doing a good job can help people pay for retirement, afford college or buy a house. That is what this business is really all about. I am also quite competitive so I am motivated by a desire to be better than all the competing funds.
e-fundresearch: What else do you want to achieve or do you have any further aims as a fund manager?
McLemore: I am relatively early in my career so I hope to achieve much more. Rather than setting ambitious goals for the future, I think I am best able to advance and grow by focusing on one day at a time and completing what I need to do each day to the best of my abilities.
e-fundresearch: What other profession would you have taken interest in, apart from becoming a fund manager?
McLemore: I haven’t given this much thought since I have been involved in the investment business right out of college striving to become a portfolio manager. In an alternate life, I would be interested in being an entrepreneur since I like creating and starting new things or maybe a veterinarian since I love animals.
e-fundresearch: Thank you for the interview!