The great irony of the money-management industry is that while managers always claim to understand what makes a great, investible business, few have actually run a company. Most are M.B.As or chartered financial analysts—CFAs—who’ve studied businesses in the abstract, via textbooks. They understand the numbers, but have no in-the-dirt experience. Some who’ve tried to run a business—see hedge fund manager Eddie Lampert at Sears—have failed miserably because of a myopic by-the-numbers approach.
Aram Green is not one of those managers. The 42-year-old steward of ClearBridge Select (LCLAX) got his start as an entrepreneur. In 1997, when he was a 20-year-old economics student at Union College in Schenectady, N.Y., he created iCollege, a database and search engine for prospective students. It went through rounds of venture capital and a merger before ultimately being sold to a company called Blackboard in 2000.
“I learned a lot about how to take an idea, build a business model around it, get external capital, and ramp up business as quickly as possible,” Green recalls. “I also learned the pitfalls that happen along the way—hiring the wrong people, making the wrong strategy decisions, and having to be nimble as competitors step on your heels.”
An insider’s perspective has improved Green’s results at ClearBridge Select, which often invests in young disruptive tech companies. The fund’s 16% five-year annualized return beats that of 99% of its peers in Morningstar’s Mid-Cap Growth fund category. It also trounces the iShares Russell 3000’s (IWV) 11% return. (Although Morningstar categorizes the fund as a mid-cap, it’s really more of an all-cap vehicle, so ClearBridge benchmarks itself against the Russell 3000, which tracks stocks of every size.)
Through his venture-capital contacts, Green met Brian Posner, a former Peter Lynch–trained Fidelity fund manager who had started hedge fund firm Hygrove Partners. Posner hired Green as an analyst in 2001, and Green learned the investing side of the business from him and from night school accounting classes at New York University. “I was a generalist analyst, but I spent about half of my time on tech, media, and telecom because that’s what I knew and was passionate about,” Green says. “It was a great time to be looking at those stocks in 2001 because the dot-com bubble had burst and everything was falling to earth.” By sifting through the rubble, he learned what made a tech company viable. When Posner became ClearBridge’s CEO in 2005, Green followed him. He stayed after Posner left in 2008.
In many respects, ClearBridge Select is similar to Hygrove’s original hedge fund, but with less shorting. Green invests in four buckets of stocks. The largest, typically 40% to 45% of his portfolio, is for disruptors—“wildly innovative businesses growing [revenues] north of 20% a year,” he says. “They’re either defining a new market opportunity that didn’t exist before, or going into an existing market where there’s some sleepy incumbent that hasn’t invested in innovation, and they’re taking a lot of market share quickly.”
One strategy that Green employs with disruptors is to analyze the private-equity market for companies before they go public. He points out that “most of the economy is private, and so talking to private companies” is valuable to understand an industry’s competitive landscape. A top holding is ServiceNow (NOW), a cloud-based information-technology service outfit that’s stealing market share from more-established players. Green began following the then-private company in 2010, after it hired a “take-no-prisoners” CEO.
Green realized that ServiceNow’s cloud-based workflow technology for handling businesses’ computer/IT problems was not only far more advanced than its rivals’, but also very flexible. The software, he says, can be used for everything from handling customer service to new-employee management—cloud-based compliance, benefits, risk training. Green bought ServiceNow at $18 during its 2012 initial public offering. Today, the stock trades at $246, and he thinks it has room to grow.
In the second bucket—generally a third of Green’s portfolio—are “durable growth companies,” he says. “They’re either in more-regulated businesses, so they can only grow so quickly or maybe they were disruptors 10 or 15 years ago and now they’re more in a steady state kind of category.”
Green puts cellphone-tower company SBA Communications (SBAC) in this category. “It’s the third-largest owner and operator of cell towers in this country, in a business that’s pretty much impossible for anyone else to break into,”he says. “There’s a nice tailwind for their business from wireless data proliferation.”
In the third bucket—typically 20% of his positions—are “evolving opportunities,” that is, value or turnaround plays. These are growth companies experiencing hiccups, but ones where Green sees catalysts for improvement. For example, “ Yelp (YELP) was a disruptor but has become pretty unloved,” he says. Yelp had difficulty managing its local sales forces, and there had been a lot of employee churn. But it’s now outsourcing sales to GoDaddy and offering tech for businesses to design their own ads. Green thinks it’s moving in the right direction.
The final bucket is “alternative” plays, which can account for 10% of Green’s portfolio. This can be private equity, high-yield bonds, or short bets.
Although Green invests heavily in technology—it accounted for 34% of his holdings as of the end of February—he won’t own more than twice the sector weight of his Russell 3000 (.RUA) benchmark, which is currently 21% tech. Also, he has largely avoided market darlings like the FAANGs—Facebook (FB), Apple (AAPL), Amazon.com (AMZN), Netflix (NFLX), and Alphabet (GOOG).
For a manager seeking the next big innovation, the FAANGs are yesterday’s news.
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