BrandywineGlobal Dynamic US Large Cap Value Fund Picks Winners (MUTF:LMBGX)

tovfla/E+ via Getty Images

After rigorous analysis of around 7,500 mutual funds, we found a low-cost fund that successfully selects companies with quality earnings and cheap valuations. BrandywineGlobal Dynamic US Large Cap Value Fund (LMBGX) is this week’s long idea.

Prospective research reveals a very attractive fund

LMBGX earns our Highly Attractive Predictive Fund rating, after our analysis of its holdings reveals the fund has a higher allocation than its benchmark to highly profitable companies with low future earnings growth expectations embedded in their stock prices. The fund’s benchmark is the iShares Core S&P US Value ETF (IUSV).

We leverage our Robo-Analyst technology[1] to drive the quality assessment of the mutual fund portfolio by analyzing the individual equity holdings of each fund. This uniquely disciplined approach allows us to create forward-looking mutual fund ratings based on the strength and valuation of the underlying business of the stocks held in a fund.

According to Figure 1, LMBGX allocates 55% of its assets to attractive or better-rated stocks, compared to only 34% for IUSV. On the other hand, LMBGX only allocates 13% of its assets to unattractive or lower-rated stocks, compared to 27% for IUSV.

Figure 1: LMBGX allocates capital to Superior Holdings

LMBGX Holdings Vs. Benchmark

LMBGX Holdings Vs. Benchmark (New Constructions, LLC)

Sources: New Constructs, LLC and company filings

BrandywineGlobal Dynamic US Large Cap Value Strategy Considers Quality and Valuation

It is no coincidence that LMBGX allocates to stocks that are better than the benchmark. LMBGX’s investment strategy uses a quantitative approach to identify stocks that “have upside potential with relatively low downside risk to the Russell 1000 Value Index”. The fund ranks stocks according to a multi-factor score, which incorporates the following criteria:

  • profit quality
  • profitability
  • investor sentiment
  • use of capital by management
  • an attractive price/earnings ratio
  • attractive price/book ratio

Unfortunately for investors, the fund does not provide details on how it measures all the criteria involved in its score. For example, the fund does not specify how it measures management’s use of capital. We suggest the fund evaluate a company’s return on investment, as accurately assessing a company’s return on investment is an important part of any disciplined investment process, as there is a strong correlation between the improved return on investment and increased shareholder value. Although we don’t know exactly how LMBGX rates management’s use of capital, the fund’s ROIC is higher than its benchmark.

The fund’s methodology not only looks for good companies, but also takes valuation into account to identify good stocks. Fund managers rely on price-to-earnings (P/E) and price-to-book (P/B) ratios, which can mislead investors. We believe the methodology could be improved by incorporating economic price-to-book (PEBV) ratio, free cash flow yield and an inverse discounted cash flow model to more accurately understand the expectations embedded in the current price of a action. Despite using lower metrics, the fund is successful in identifying stocks whose future growth expectations are well below the benchmark.

Quality stocks generate a very attractive risk/reward rating

Figure 2 contains our detailed rating for LMBGX, which includes each of the criteria we use to rate all covered mutual funds. These criteria are the same for our equity rating methodology, as the return on a mutual fund’s holdings is equal to the return of the mutual fund after fees have been deducted.

Figure 2: Breakdown of the BrandywineGlobal Dynamic US Large Cap Value fund

Distribution of LMBGX holdings

Distribution of LMBGX holdings (New Constructions, LLC)

Sources: New Constructs, LLC and company filings

LMBGX’s holdings outperform IUSV in four of the five criteria that make up our holdings/portfolio management analysis. Specifically:

  • LMBGX ROI is 13% and higher than the 11% earned by IUSV holdings
  • LMBGX’s free cash flow yield of 4% is higher than IUSV’s 3%
  • the price to economic book value (EPBV) ratio for LMBGX is 1.1, which is much lower than the 2.6 for IUSV
  • our discounted cash flow analysis reveals an average period of implied market growth appreciation of only seven years for LMBGX holdings versus 27 years for IUSV

Stocks held by LMBGX generate higher quality cash flow and have lower valuations than IUSV. Market expectations for the shares held by LMBGX imply that earnings will increase by only 10% (measured by the PEBV ratio), while expectations embedded in IUSV’s holdings imply that earnings will increase by 126%.

A Closer Look at LMBGX’s Quality Holdings

Of the 104 LMBGX holdings covered:

  • 100% have a positive ROIC
  • 80% have a positive free cash flow return
  • 81% have a PEBV ratio of 1.3 or less
  • 81% have a GAP of 10 years or less
  • only 13% receive a risk/reward rating below Neutral

Given its ability to identify quality companies at low valuations, it’s no wonder that 11% of the mutual fund’s assets are allocated to stocks that we have presented as long ideas. Figure 3 shows the 11 LMBGX holdings that are open long ideas.

Figure 3: Open long ideas that LMBGX holds

Society Teleprinter % actives
JPMorgan Chase & Company JPM 3%
Allstate Corp. ALL 2%
Oracle Corporation ORCL 2%
Johnson & Johnson JNJ 1%
Walmart Inc. WMT 1%
Verizon Communications, Inc. VZ 1%
Amgen Inc. AMGN 1%
SYSCO Company SYY 1%
The Walt Disney Company SAY 1%
Universal Health Services, Inc. UHS
Discover financial services DFS
Total 11%

Sources: New Construction, LLC

Selected quality inventory at below average cost

LMBGX’s total annual costs of 0.91% are well below the simple average of 1.59% and the weighted average of 1.22% of the 948 other All Cap Value mutual funds covered. Figure 4 shows our breakdown of LMBGX’s total annual costs, which is available across all of the 6,600+ funds and 900+ ETFs covered.

Figure 4: Breakdown of total annual costs of LMBGX

LMBGX Total Annual Cost Analysis

LMBGX Total Annual Cost Analysis (New Constructions, LLC)

Sources: New Constructs, LLC and company filings

The importance of sector and holdings-based fund analysis

We offer our clients detailed reports for all 7,500+ ETFs and mutual funds covered. Click below for a free copy of LMBGX’s standard mutual fund report.

Simply buying a mutual fund or ETF based on past performance does not necessarily lead to outperformance. Only through asset-based analysis can it be determined whether a mutual fund is allocating stocks with high-earnings quality, low-valuation companies, as LMBGX does. .

Most investors don’t realize they can already get the sophisticated fundamental research that allows investors to overcome inaccuracies, omissions, and biases in legacy fundamental data sets. Our Robo-Analyst technology analyzes the holdings of all under-hedged mutual funds and ETFs to avoid “inner danger”. Our due diligence on holdings allows us to cut through the noise and find mutual funds, like BrandywineGlobal Dynamic US Large Cap Value Fund (MUTF:LMBGX), with a portfolio that suggests future performance will be strong.

Build an even better fund

As we showed in The Paradigm Shift to Self-Directed Portfolio Construction, new technologies allow investors to create their own funds at no cost while allowing for better and more sophisticated weighting methodologies. If we reallocate fund assets based on economic benefits, our personalized fund allocates:

  • 74% of assets are invested in attractive or better rated stocks (compared to 55% for LMBGX)

See a detailed view of the quality of stock allocations in our custom fund versus LMBGX’s actual allocation here.

This article originally published on January 19, 2022.

Disclosure: David Trainer, Kyle Guske II, and Matt Shuler receive no compensation for writing about a specific stock, style, or theme.

[1] Our Robo-Analyst technology provides superior fundamental data, as proven by The Journal of Financial Economics, and a new source of alpha.

Comments are closed.