Clearbridge Value Trust letter to shareholders for the first quarter ended March 31, 2015.

H/T Dataroma

Clearbridge Value Trust – Market overview

Major U.S. averages opened the year with mixed gains, as investors continued to focus on the Federal Reserve’s rate strategy amid mixed economic reports, suppressed crude prices, and the climbing dollar, as well as another flurry of merger and acquisition announcements. The dollar strengthened +12.7% against the euro over the quarter and it is now up more than +20% against a broad basket of foreign currencies over the past nine months. The 10-Year yield closed March at 1.93%, after falling as low as 1.4% in January and rising above 2.24% in mid-March. Oil prices fluctuated between $45 and $54 throughout the quarter, largely reacting to reports that capacity in Cushing, Oklahoma is running out for crude supplies, as well as Saudi Arabia launching air strikes against Iranian-backed rebels in Yemen while U.S. diplomats carry out nuclear program negotiations with Iran and other world leaders.

The S&P 500 and Dow Jones posted modest gains of +1.0% and +0.3%, respectively, while the Nasdaq climbed +3.9% over the quarter. The small-cap Russell 2000 and Russell MidCap each jumped more than +4.0%, outstripping the +1.6% rise for the large-cap Russell 1000. Meanwhile, growth outperformed value substantially, with the Russell 1000 Growth’s +3.8% return more than +450 bps above that of the Russell 1000 Value. The S&P was weighed down by the utilities sector, off -5.2%, and energy once more, down another -2.9%. Meanwhile, the health care and consumer discretionary sectors paved the way higher, up +6.5% and +4.8%, respectively.

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Fourth-quarter GDP expanded at an annualized rate of +2.2%, below consensus and well short of the third quarter’s +5.0% growth. Retail sales excluding energy declined three months in a row between December and February, with reports pointing to record-cold temperatures during the season as the culprit for the disappointment. A 17% decline in housing starts was also attributed by many to the harsh winter weather. On a positive note, U.S. employers added nearly 600K jobs in the first three months of the year, pushing down the unemployment rate to 5.5% from 5.6% at year-end. Consumer confidence also unexpectedly spiked to the highest level in 11 years.

Fed Chair Janet Yellen delivered her semi-annual testimony to the Senate in February and asserted the committee would not nail down a timetable for raising target rates, nor point to one specific metric to trigger an increase. Yellen further commented that “raising rates too soon would be undermining to the recovery that is just taking hold.” Following their March meeting, the committee dropped its long-held “patience” assurance with regard to raising rates, as expected. However, the central bank unexpectedly pared back its expectations for the scale of rate raises and downgraded its forecasts for economic growth and inflation. Fed-funds futures now show market participants seeing an 8% likelihood of a rate increase in June, compared with 30% as of year-end.

Approximately 68% of the S&P’s constituents reported better-than-expected bottom-line results during earnings season, while 21% disappointed. However, many companies tempered guidance for 2015, citing significant foreign exchange headwinds as the dollar strengthened against foreign currencies. Meanwhile, low borrowing rates continued to foster M&A activity as a slew of multibillion-dollar deals were announced recently, particularly in the health care sector. Notably, Pfizer announced a $17B cash offer for Hospira, AbbVie agreed to buy drug maker Pharmacyclics for $21B, and UnitedHealth Group plans to purchase Catamaran for $13B. Elsewhere, H.J. Heinz and Kraft Foods Group signed a definitive merger agreement to form the Kraft Heinz Company, which will create the third-largest food and beverage company in North America. In other news, the Fed announced that its annual “stress test” of the 31 largest banks operating in the U.S. found all the banks had sufficient capital to withstand a hypothetical economic shock. Nearly every bank’s capital return proposals passed the CCAR tests, as well.

The World Bank lowered its 2015 growth expectations from +3.4% to +3.0% due to weakness in Japan and the eurozone, though it pointed to the U.S. as one of the strongest economies. This tempered forecast was underscored by China’s +7.3% GDP expansion in 2014, its weakest pace in over 20 years. European GDP also expanded by only +0.3% in the fourth quarter, thanks to German output buoying contractions and stagnation in other member countries. ECB President Mario Draghi announced an expanded asset-purchase program through at least September 2016 to combat threats of deflation. Overseas headlines also centered on ongoing debt talks between Greece and its creditors after the new anti-austerity Syriza party unveiled plans to cut about a third of its economic reforms dictated in the terms of its debt. Ultimately, the International Monetary Fund, the ECB and the European Commission approved a four-month extension, preventing the country’s current loan agreement from expiring, and easing fears that Greece could leave the eurozone.

Clearbridge Value Trust – Fund highlights

During the first quarter of 2015, the ClearBridge Value Trust – Class C shares generated a total return of 0.23%. In comparison, the Fund’s unmanaged benchmark, the S&P 500 Index, returned 0.95% and the Lipper Large Cap Core Funds category average was 0.91% for the same period.

Using a three-factor performance attribution model,1 relative portfolio performance was driven by security selection effects and sector allocation, partially offset by the interaction of sector allocation and security selection. In terms of sector allocation, an overweight position in financials and an underweight in consumer discretionary hurt relative performance, as the former sector underperformed the benchmark while the latter outperformed. NXP Semiconductors, Amazon, UnitedHealth Group, E*TRADE Financial and Apple were the largest contributors to performance, while the biggest detractors included Microsoft, Ralph Lauren, EMC, CONSOL Energy and Yahoo!.

During the first quarter we initiated four new positions: Steel Dynamics, McDonald’s, Albemarle and AbbVie. Four positions were eliminated, as well, during the quarter: Target, Phillips 66, Realogy Holdings and Dr Pepper Snapple Group.

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