Legg Mason Affiliate Portfolio Managers Eying Volatility

LONDON, July 30, 2015 /PRNewswire/ -- At a recent conference in London to discuss prospects for the increasingly unpredictable global financial markets, portfolio managers from Legg Mason's affiliates were asked, "What risks do you think are not fully appreciated by investors now?"

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For three the focus was on market volatility – its relative lack, despite an uptick lately. While it increases concern and risk, each believes low volatility is creating opportunity for active asset managers and investors.

According to Evan Bauman, a Managing Director and Portfolio Manager with ClearBridge Investments, the "thing that makes me cautious is the lack of volatility in the market."

"The U.S. stock market is at all-time highs, or close to all-time highs," Mr. Bauman said. "You've also seen the VIX Index with volatility measures near or at new all-time lows. Generally lower volatility leads to lesser volumes and a more thinly-traded stock market."

The ClearBridge team is always on the lookout for "liquidity events," where market volumes and volatility rise quickly. Mr. Bauman considers it important to "take advantage of liquidity events – if and when they present themselves – similar to what happened in October of last year, where the market had a 10 percent correction in a very short period of time, or what happened in the energy complex over the last nine to 10 months."

"As long-term growth managers, really arbitragers of time, we try to take advantage of these liquidity events," Mr. Bauman said. "But in general volumes and volatility in the market have been much lower. This can present risk, if and when you get liquidity shocks, similar to the Flash Crash of 2010 or the sharp pullback we saw in 2011. The lack of volatility or volumes, in general, presents short-term risk to the market."

That view was echoed by James Norman, President of QS Investors, who focused on the impact of quantitative easing policies being pursued by the European Central Bank (ECB).

"Volatility has been very low because that massive amount of quantitative easing is being pushed into the market," Mr. Norman said. "What usually happens is that comes to an end and investors are not sure what to do. Any small macroeconomic event or geopolitical risk that's abundant, some clear but some not known, can have a very violent impact on equity markets. Equities ... have been made much more attractive in terms of potential for return."

However, Mr. Norman warned, "You have to be careful to make sure you address the risks. Defensive equities are a great way to try to capture upside but also deal with macro risks."

"We feel it is really important to focus on more defensive opportunities," he advised. "And in particular on ones that produce income. In this yield-starved environment, which is exactly what the quantitative easing really brings about, you have to search for income. At the same time, though, you also want to search for return – but in a very defensive nature."

"What is very hard to predict is where investors are going to seek returns and the impact on those markets, and how long that will last," Mr. Norman added. "That is a very large macro event, because we see tightening of the rubber band in terms of valuations in certain asset classes. It is hard to know which rubber bands will be tightened, how tight they will become and – when they snap – what the impact will be across various asset classes."

For Bill Hench, Portfolio Manager of the Royce & Associates US Small Cap Equity Strategy, investors should pay attention to the growth of the exchange traded funds (ETF) industry.

"There's a tremendous amount of products out there, making promises or attempts at giving certain types of returns to investors," Mr. Hench observed. "I don't think enough attention is paid to the risks involved, especially when it comes to liquidity in things like fixed income, some of the more dicier credits and small cap and micro-cap, where liquidity in the best of times is not so great."

While permutations of ETFs carry risks, they also create opportunities for savvy investors.

"For managers like ourselves who deal in illiquid markets, it's something we can take advantage of," Mr. Hench said. "With the growth of this industry, you've seen growth in liquidity during stressful times and in times of exuberance. If you've lived through the cycles and seen what markets can do when the liquidity dries up, and what you could do when liquidity is very bountiful – you're able to really take advantage. Over the long term it could add to your performance."

About Evan Bauman

A Managing Director and Portfolio Manager with ClearBridge Investments, Evan Bauman co-manages the Aggressive Growth, Multi Cap Growth and All Cap Growth strategies. He has 19 years of investment industry experience, all with ClearBridge and its predecessors. Mr. Bauman started in 1996 as an intern, before graduating with a B.S. in mathematics from Duke University.

About William A. Hench

A Portfolio Manager with Royce & Associates who run the US Small Cap Equity Strategy, Bill Hench has 22 years of investment industry experience. He joined Royce in 2002 from JP Morgan after 10 years in the institutional equity business in Boston and New York. Mr. Hench began his career as a CPA with Coopers & Lybrand in 1986. He holds a Bachelor's degree from Adelphi University.

About James Norman

President of QS Investors, James Norman is responsible for assisting the CEO with all business, strategic and investment decisions. He is also a member of the firm's Investment Oversight Committee and responsible for global equity (DBI) strategy development. Before joining QS Investors Mr. Norman was head of Deutsche Asset Management Quantitative Strategies Qualitative Alpha research. While at Deutsche Asset Management, from 1995 to 2010, he also served as Global Head of Product Management, Senior Portfolio Specialist for Active US Equity and Asset Allocation, and as a senior management consultant. Previously he spent five years as a senior casualty underwriter for CIGNA International. Mr. Norman has an A.B. in economics from Vassar College and a M.B.A. from New York University.

About ClearBridge Investments

ClearBridge Investments is a well-established global investment manager with $117.8 billion in assets under management as of March 31, 2015. With a legacy dating back over 50 years, our long-tenured portfolio managers and fundamental research team focus on building equity portfolios for clients who seek income solutions, high active share or low volatility. Owned by Legg Mason, ClearBridge operates with investment independence from headquarters in New York and offices in Baltimore, San Francisco and Wilmington.

About QS Investors

A wholly-owned, independently-managed affiliate of Legg Mason, Inc., QS Investors, LLC was formed in 1999 as the quantitative platform of a global asset manager. As an investment firm providing asset management and advisory services to a diverse array of institutional clients, QS Investors delivers disciplined, systematic solutions that address clients' complex challenges. The QS team has developed unique approaches to integrating quantitative and behavioral investment insights and dynamically weighting opportunities in response to changing economic and market conditions. Risk identification, assessment and management are intrinsic to their process. Based in New York, QS Investors offers a broad spectrum of strategies to clients worldwide, including actively managed U.S. and global equities, liquid alternatives and customized solutions.

About Royce & Associates, LLC

For more than 40 years Royce & Associates, LLC, investment adviser to The Royce Funds, has used a disciplined, value-oriented approach to select micro-cap, small-cap and mid-cap companies. The firm has a seasoned staff of investment professionals, most with more than 15 years of experience. Chuck Royce, the firm's founder and a pioneer of small-cap investing, enjoys one of the longest tenures of any mutual fund manager. Royce & Associates, LLC is a wholly owned affiliate of Legg Mason Inc.

About Legg Mason

Legg Mason is a global asset management firm with $699 billion in assets under management as of June 30, 2015. 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 investments involve risk, including loss of principal. Past performance is no guarantee of future results. Equity securities are subject to price fluctuation and possible loss of principal. International investments are subject to special risks including currency fluctuations, social, economic and political uncertainties, which could increase volatility. These risks are magnified in emerging markets. Income and yields will fluctuate and are not guaranteed.

The views expressed are subject to change based on market and other conditions. These are not intended to be a forecast of future events, a guarantee of future results or investment advice.

The VIX is a benchmark indicator that measures market expectation of near-term volatility expressed by stock option prices.

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