LRGE - CACG: Does This Actively Managed All-Cap Growth ETF Earn Its Fees?

2023-07-18 14:32:34 ET

Summary

• CACG is an actively-managed all-cap growth fund with a 0.53% expense ratio. Assets under management are just over $100 million.
• CACG aims to select a small group of stocks with high growth potential, low valuations, and meet proprietary ESG criteria. However, my analysis reveals the valuation is not met.
• The ETF has also consistently underperformed the Russell 3000 Growth Index and most other large-cap growth funds since its launch in 2017. Therefore, management hasn't proven the strategy works yet.
• I don't recommend readers buy CACG, but this article includes fundamental analysis on LRGE, ClearBridge's large-cap growth ETF, and three other ETFs that could be better choices.

Investment Thesis

The ClearBridge All Cap Growth ESG ETF ( CACG ) is an actively-managed growth fund holding approximately 70 securities with above-average long-term growth potential, attractive valuations, and that meet ClearBridge's proprietary ESG criteria. In addition, management takes a multi-year time horizon, evidenced by a low 15% average portfolio turnover rate between 2017-2023. Given this statistic, I can evaluate management's style based on current selections.

Unfortunately, I don't think CACG has an attractive valuation. On a weighted average basis, CACG trades at 35.51x forward earnings and 30.50x trailing cash flow, significantly above what other multi-cap funds like the iShares Core U.S. Growth ETF ( IUSG ) feature and even slightly higher than competing funds like the Nuveen ESG Large Cap Growth ETF ( NULG ). I suspect this is why CACG has underperformed its stated benchmark, the Russell 3000 Growth Index, since its May 2017 launch. While there are positive features like a solid 12.51% estimated earnings growth rate, its fundamentals aren't attractive, and its track record isn't impressive enough to consider. Therefore, I recommend readers pass on CACG.

CACG Overview

CACG's fact sheet describes the fund's key features, including:

1. Conviction and ESG integration: maintains a high conviction portfolio of large-, mid-, and small-cap stocks with above-average long-term earnings and/or cash flow growth potential and integrates proprietary ESG analysis into the research process.

2. Portfolio managers allocate across the growth spectrum (cyclical, stable, select) at attractive valuations.

3. Actively managed by a seasoned portfolio management team.

With actively-managed funds, the key is developing a solid track record. However, its fact sheet also highlights how CACG has underperformed its benchmark, the Russell 3000 Growth Index, by 4.58% per year over the last five years. CACG has amassed only $112 in assets under management, and I believe the two statistics are linked.

Other important information is CACG's relatively high 0.53% expense ratio and its once-per-year dividend payment, which, in 2021-2022, consisted primarily of long-term capital gains. The chart below shows that dividend income from underlying holdings was only $0.11 per share last year, while total distributions per share were $2.41.

CACG Performance Analysis

Although technically an all-cap fund, Lipper and Morningstar classify it as Large-Cap Growth. Furthermore, 58/69 current constituents (93.46% by weight) have market caps above $14.5 billion, the minimum threshold S&P Dow Jones Indices set. However, I'll first assess CACG as an all-cap fund against others with similar classifications. Three others I've identified that preceded CACG are:

1. iShares Core U.S. Growth ETF ( IUSG )
2. iShares Morningstar Large-Cap Growth ETF ( ILCG )
3. First Trust Multi-Cap Growth AlphaDEX Fund ( FAD )

Since June 2007, CACG has delivered an annualized 11.39% return compared to 13.59%, 14.65%, and 11.08% for IUSG, ILCG, and FAD. On risk-adjusted returns (Sharpe and Sortino Ratios), CACG also fell short.

Most of this underperformance is traced to 2021, when CACG lagged behind IUSG and ILCG by 12.84% and 5.91%. Part of this is likely related to CACG's all-cap strategy, as management perhaps felt it necessary to diversify by size to satisfy client expectations. However, the ClearBridge Large Cap Growth ESG ETF ( LRGE ), which has two of the same portfolio managers, also lagged its benchmark, the Russell 1000 Growth Index, by 4.51% in 2021. Evidently, there is a problem with the approach.

Finally, I mentioned CACG's low average 15% portfolio turnover rate between 2018-2023 in my investment thesis. As shown below, it's consistent, so its current weighted average of $538 billion market capitalization is standard.

CACG favors large-cap growth stocks, so it's only fair to compare its performance against other large-cap growth ETFs, including LRGE. I've done that in the following table by providing annual performance rankings for CACG and LRGE. The sample is 23 ETFs with a track record since 2018. Please note that 2023's YTD returns are through June 30.

These performance rankings underscore my argument that CACG's managers have yet to deliver alpha. Its best year is 2023, but its #11/23 ranking is only average. LRGE did better, ranking #4/23 in 2018 and #5/23 in 2023. However, it also performed below average from 2020-2022. The best average ranking in this sample was NULG, and given how it also integrates ESG criteria into its selection process, it seems like a better choice.

CACG Analysis

Sector Exposures and Top Ten Holdings

Sector exposures for CACG, LRGE, IUSG, ILCG, and NULG are below. One interesting statistic is CACG's 39.79% and 19.67% exposures to the Health Care and Technology sectors. ClearBridge Investments explained this in their latest quarterly commentary , provided to Seeking Alpha subscribers. Management currently prefers companies with "strong growth and profit margins and low financial leverage." They also took advantage of a 20% selloff of Eli Lilly ( LLY ) stock, which has rebounded nicely this year.

CACG has no exposure to Energy and Utilities, which is typical for a growth ETF. Oil prices are well below their highs from last year, and growth estimates in the sector have dried up. And Utilities have never been a high-growth sector. LRGE holds NextEra Energy ( NEE ), the main exception in the sector, but otherwise, the composition is what you'd expect from a large-cap growth fund.

Finally, I've listed CACG's top ten holdings below, which total 41.25% of the fund. Most make sense to me, but Amazon ( AMZN ) and Meta Platforms ( META ) are curious additions, as analysts expect -7.25% and 2.17% earnings per share growth over the next twelve months.

In the previously-linked article by ClearBridge Investments, management noted how Amazon's AWS growth was slowing and how Meta's primary focus was operational efficiency. It could mean managers exit these positions if growth doesn't resume quickly. However, these would be significant changes and inconsistent with CACG's historically low turnover rates.

CACG Fundamental Analysis

The following table highlights selected fundamental metrics for CACG's top 25 holdings, totaling 66% of the portfolio. I've also listed summary metrics for the four ETFs above in the bottom rows.

ClearBridge's approach is to focus on a select group of growth stocks and not broad-based like what IUSG, ILCG, and even NULG features. Still, LRGE is the most concentrated, with 80% of holdings in the top 25 and only 42 in total. That's one argument favoring CACG if you go with ClearBridge.

Compared with LRGE, CACG's selections have slightly higher historical sales growth (15.94% vs. 12.36%) over the last five years. CACG also offers an estimated 12.36% and 12.62% sales and earnings per share growth, which is more or less in line with LRGE. The advantage is a lower forward price-earnings ratio (35.51 vs. 37.85) and a lower trailing price-cash flow ratio (30.50 vs. 34.04), but these are still elevated. IUSG, for example, trades about six points less on forward earnings, and there's just a 1.17% sacrifice on estimated earnings per share growth. Growth investors might appreciate this discount, especially in a market downturn. Recall how high P/E stocks fell out of favor in 2022, and there's always a chance history will repeat itself after 2023's remarkable first-half run.

A component of ClearBridge's selection process is ESG-based. If this fits your investment philosophy, I don't see a reason to select CACG over NULG. NULG is similarly diversified with a 1-3.5% advantage on sales, EBITDA, and earnings per share growth and trades at an identical 35.50x forward earnings. Also, its 6.56/10 EPS Revision Score indicates similar earnings momentum as CACG (6.52/10), and its 9.21/10 Profitability Score is slightly better.

Investment Recommendation

CACG has a relatively poor track record since its launch, and for an actively-managed fund with a high 0.53% expense ratio, that's what matters most. I found that CACG typically selects large-cap growth stocks, and plenty of other low-cost competitors have comparable fundamentals and better results. For those looking to go the ESG route, NULG has a better growth and valuation combination, outperformed CACG by over 4% per year since June 2017, and has a much lower 0.26% expense ratio. Given these statistics, I think ClearBridge Investment managers have yet to prove themselves, and therefore, I recommend readers avoid CACG at this time.

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