Brandywine Global Quantitative Equity Models Fortell Opportunity

PROPRIETARY ANALYSIS SUGGESTS ADDING HIGHER-QUALITY NAMES

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Apr 09, 2015, 11:00 ET

PHILADELPHIA, April 9, 2015 /PRNewswire/ -- The quantitative model behind the Legg Mason BW Dynamic Large Cap Value Fund, managed by affiliate Brandywine Global, suggests that equity markets may be entering a phase in which higher-quality exposures, like companies with greater profitability, can outperform.

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The fund's portfolio manager, Mike Fleisher, said, "Owning attractively valued stocks are a great way to outperform the market over the longer term. Ten years ago, our team discovered that one compelling market indicator — valuation dispersion in the equity market — can provide a reliable signal for when to rotate toward value stocks with higher-quality characteristics. When equity valuations become compressed, as is happening now, investors can generate outperformance while improving downside management characteristics by adding quality."

"The Dynamic Switching Tool we created to exploit our findings only changes twice in each full market cycle, giving rise to what we see as two distinct phases in all market cycles: a broad-value and a deep-value environment."

"Although many quantitative managers decompose market returns into a broad array of complex factors, we focus on intuitive factors: chiefly valuation, quality and investor sentiment," Mr. Fleisher said. "In moving to a broad-value or deep-value cycle, we change which factors are emphasized based on historical performance we can track back to the 1960s."

The Brandywine Global Diversified Equity team believes their Dynamic Switching Tool is nearing a critical trigger point and close to shifting to a broad-value environment.

"Broad-value environments are defined by tighter spreads between stock valuations — usually coinciding with mid- to late-cycle equity expansion periods," Mr. Fleisher explained. "Not surprisingly, our research shows that excess returns can be achieved by tilting priorities toward higher-quality companies in broad-value environments."

Deep-value environments are defined by wide valuation dispersion among stocks, typically occurring after substantial market dislocations. The last deep-value environment began in 2009, prior to the end of the recession, when markets exhibited significant disagreement on valuations.

During a deep-value environment, investors can benefit from owning stocks that exhibit a blend of higher volatility and inexpensive valuation. Higher-quality exposures in a deep-value environment, however, can weigh on upside capture.

"Volatility offers a great proxy for fear, exactly the type of emotion from which money can be made after a market dislocation," Mr. Fleisher said. "Once market participants calm down and a broad-value environment sets in, high volatility becomes less important. Price momentum and quality then can become better predictors of outperformance."

However, Brandywine Global warns investors not to confuse a switch to a broad-value environment with a definite call for the bull market to end soon.

"Since the 1960s, deep-value environments have all lasted between three-and-half and five years before changing to a broad-value environment," Mr. Fleisher explained. "The current deep-value environment is already quite extended at six years. Patience is required to properly take advantage of a style dominance shift. While valuations have become significantly more compressed since the March 2009 market bottom, a secondary signal in our proprietary Dynamic Shift Tool has not yet activated."

"Just like the overly extended deep-value period, the mid to late stages of the current bull market could run longer than in typical cycles. This likely stems from the unusually long period of modest economic growth and ultra-accommodative monetary policies."

About Michael J. Fleisher

A portfolio manager on the Diversified Value Equity team, Michael Fleisher leads the Dynamic Large Cap Value Equity strategy and is the lead portfolio manager on the Brandywine Global sub-advised Legg Mason BW Dynamic Large Cap Value Equity Fund. He also oversees the quantitative development and analysis function for Brandywine Global's Diversified Value Equity strategies and contributes to the firm's ongoing research into value investing. Before joining Brandywine Global in 1997, Mr. Fleisher was a senior fund accountant for Merrill Lynch (1995-1997), and a mutual fund analyst for SEI Corporation (1993-1995). He earned a B.S. in Accounting from the University of Delaware.

About Brandywine Global

Founded in 1986, Brandywine Global Investment Management offers a broad array of fixed income, equity, and balanced strategies that invest across global markets. As of December 31, 2014, Brandywine Global manages $63 billion in assets. The firm is a wholly owned, independently operated subsidiary of Legg Mason, Inc. (NYSE: LM), and is headquartered in Philadelphia with an office in San Francisco. Brandywine Global also operates two affiliated companies with offices in Singapore^[¹] and London^[²].

1. Brandywine Global Investment Management (Asia) Pte. Ltd.;
2. Brandywine Global Investment Management (Europe) Limited is authorized and regulated by the Financial Conduct Authority (the "FCA"). (FRN 472774). Registered in England and Wales, No. 06324517

About Legg Mason

Legg Mason is a global asset management firm with $711 billion in assets under management as of February 28, 2014. The Company provides active asset management in many major investment centers throughout the world. Legg Mason is headquartered in Baltimore, Maryland, and its common stock is listed on the New York Stock Exchange (symbol: LM).

All investing involves risk. Equity securities are subject to price fluctuation and possible loss of principal. Large-capitalization value stocks may underperform the overall equity market for long periods. The manager's selection process may prove incorrect, which may have a negative impact on the Fund's performance. International investments are subject to special risks including currency fluctuations and social, economic and political uncertainties, which could increase volatility. These risks are magnified in emerging markets.

The value of the Fund's investments held for cash management or defensive investing purposes may be affected by changing interest rates and changes in the underlying investments' credit ratings.

Before investing, carefully consider a fund's investment objectives, risks, charges and expenses. You can find this and other information in each prospectus, or summary prospectus, if available, which is available at www.leggmason.com/individualinvestors. Please read it carefully.

All investments involve risk, including loss of principal. Past performance is no guarantee of future results.

These opinions are not intended to be a forecast of future events, a guarantee of future results, or investment advice. All data referenced are from sources deemed to be reliable but cannot be guaranteed. Securities and sectors referenced should not be construed as a solicitation or recommendation or be used as the sole basis for any investment decision.

INVESTMENT PRODUCTS: NOT FDIC INSURED | NO BANK GUARANTEE | MAY LOSE VALUE

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SOURCE Legg Mason, Inc.