FUND WATCH


A Go-Anywhere Fund

Legg Mason Partners Capital cuts across company sizes and investment styles.



Brian Posner was a young hotshot portfolio manager at Fidelity Investments in the 1990s. He left to manage money at Credit Suisse Asset Management, then co-founded a hedge fund.

Last year, Posner rejoined the mutual fund world when he became chief executive of what's now called ClearBridge Advisors, a firm with $110 billion in assets that used to run Smith Barney's stock funds. ClearBridge is now part of Legg Mason (which turned over management of Smith Barney's bond funds to its Western Asset Management unit). But Posner was eager to keep an active hand in fund management, so he co-manages Legg Mason Partners Capital (symbol SCCAX for class A shares) with Brian Angerame.

This is a flexible, go-anywhere fund -- an approach Posner labels "very liberating" for a fund manager with his experience. So his relatively concentrated portfolio of 40 stocks cuts across company sizes and investment styles. Posner calls himself a value investor, but as with his Legg Mason colleague Bill Miller, it's clear that he's a value investor who has embraced technology investing.

In looking for attractive stocks, Posner focuses on a business' ability to generate cash. His first stop is to measure free cash flow (operating earnings plus depreciation and other non-cash charges minus the capital expenditures necessary to maintain a business) and compare this figure to enterprise value (market value plus net debt). He notes that he deploys this tangible method of valuing a company whether it's a fast-growing technology company or a slower-growing energy or finance business.

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For instance, after he took the reins at LM Partners Capital in July 2006, he made Cisco Systems (CSCO) one of the fund's largest positions (Posner says he totally overhauled the portfolio within a month of taking over). "A year ago, the question was, could Cisco grow revenues more than 5%," he recalls. "The probability was yes."

More importantly, he correctly projected that Cisco's cash return -- free cash flow relative to revenues -- would be much brisker than revenue growth. Cisco and IBM (IBM), another holding, epitomize a technology industry that Posner says has "grown up" since the late 20th century and now focuses more on capital allocation and cash returns than on simply growth.

Posner's largest holding is American Express (AXP), which he reckons is mistakenly viewed and valued as a credit-card company. "It's a processing company with financial operations," he says. He sees it as a company with a towering return on equity (a measure of profitability), low capital requirements and modest exposure to credit risk -- and therefore an attractive business in which to invest.

The story behind Accenture (ACN), another top-ten holding, is similar. It's usually labeled a technology or software company, but it's really a consulting business with huge returns on equity, modest capital needs and strong cash generation. Accenture, the leading IT consultant, strikes Posner as a business that will reward a long-term holding period.

Posner shows his eclectic investing style with a large position in energy stocks, including Anadarko Petroleum (APC) and Diamond Offshore Drilling (DO). He thinks we may be early in a bullish hydrocarbon cycle marked by growing demand from emerging markets and supply constraints. "Over the course of history," he says, "[petroleum] cycles are very long. Until three or four years ago, there was a 15-year down cycle."

Legg Mason Partners Capital returned 17% over the past year through August 24. That edges Standard & Poor's 500-stock index by one quarter of a percentage point. The fund's A shares impose a front-end sales charge of 5.75%, and B and C classes levy fat ongoing 12b-1 fees. But if you invest through a financial adviser, you may be able to gain access to the fund with the load waived.




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