The Legg Mason IF Martin Currie US Unconstrained fund has shunned the typically-held FAANG (Facebook, Apple, Amazon, Netflix and Google) stocks, with the exception of Amazon, as manager Zehrid Osmani instead seeks out "better opportunities" in the market for his high conviction, highly-concentrated strategy.
Currently holding 24 positions, the fund typically holds between 20 and 30, according to the manager, who said the fund remains diversified despite itshigh concentration.
Osmani said the best opportunities in the US reside in healthcare, technology, consumer firms and industrials, but only one of the FAANGs meets the "attractive businesses, attractively priced" purchasing model that "any investor" should be adhering to. However, it still does not feature in the fund's top ten holdings.
"In the case of Amazon, we are happy with the combination of the gross profile and the future returns profile that business can bring," Osmani said.
"We also think it is a name that is less at risk from any regulatory effects that these types of business and platform might invite."
Concerns surrounding regulatory threats keep the fund from investing in Facebook and Google, which Osmani believes do not provide good visibility about safeguarding against these headwinds, and have also suffered a "loss of customer trust from the way they have been using data in the past", which could impact the firms' future growth.
In regards to Apple, despite being a "well established company with an attractive growth and returns profile", the competitive threat from "more innovative" operators such as Samsung risks eroding the US tech firm's pricing power and market share in the long term.
The competitive landscape dissuades Osmani from Netflix too, with the constant pressure from "Amazon Prime, Apple TV, Disney and the like", along with "the search for more content and the need to invest in more content" leaving the firm's long term returns appearing unattractive for the manager.
"We are very positive on healthcare generally for the long term," said Osmani, "but if you look at the stocks that we hold, they are not large cap or pharmaceuticals."
The manager cited the combined threat of patent expirations, pressure to reduce healthcare bills and a "lack of R&D productivity" as reason to exclude these types of firms, instead preferring companies operating in areas with "less competitive pressure, which gives them more pricing power and permits them to have higher returns".
The fund's largest holding is in Masimo Corp, a patient monitoring technology firm, which operates in a "two-player market" and holds 50% market share alongside 70%-80% share of new orders.
"Masimo is grabbing more of the market than its competitor because it has stronger innovation and better R&D, which means their products are far superior."
Legg Mason IF Martin Currie US Unconstrained has outperformed its benchmark and sector over the past 12 months, returning 21.3% compared to MSCI USA returns of 13.84% and the IA North America performance of 9.1%, according to data from FE fundinfo.