The ClearBridge All Cap Growth Strategy navigated a dynamic second quarter in 2025, experiencing a significant market rebound led by growth stocks, particularly in the technology and communication services sectors. While the strategy's diversified exposure presented a headwind compared to its concentrated benchmark, it capitalized on increased market volatility to strategically enhance its portfolio. This included making new investments in biopharmaceutical and high-growth IT companies, underscoring a commitment to active management and research-based stock selection. The quarter's results demonstrate the strategy's adaptability and focus on building a resilient portfolio designed for various economic scenarios.
The second quarter of 2025 saw U.S. equities achieve robust gains, with the S&P 500 Index returning 10.9% and the NASDAQ Composite soaring by 17.7%. Both indices transitioned from bear or near-bear markets to reach all-time highs. The Russell 3000 Growth Index outperformed, rising 17.6%, significantly exceeding the Russell 3000 Value Index by over 1,300 basis points. Initially, stocks declined in April due to renewed tariff concerns but quickly recovered following a 90-day implementation delay, bilateral trade agreements, and a more conciliatory stance from the White House regarding China and Federal Reserve policy. May marked the S&P 500's best monthly performance since November 2023, driven by a continued brightening trade outlook, while June maintained positive momentum despite geopolitical tensions in the Middle East.
The market rebound was characterized by a resurgence of mega-cap AI leadership, with hyperscalers demonstrating strong commitment to AI-driven capital expenditures. Companies like Microsoft and Meta Platforms significantly outpaced the benchmark, alongside semiconductor giants such as Nvidia and Broadcom, fueled by robust earnings and renewed expectations for widespread AI adoption.
The ClearBridge All Cap Growth Strategy’s mega-cap positioning was largely neutral during the quarter. An overweight in Meta and an underweight in the underperforming Apple counterbalanced relative headwinds from underweights in Microsoft and Nvidia. However, the strategy generally lagged the benchmark due to underperformance within its healthcare holdings. On a broader sector basis, information technology (+25.4%), communication services (+24.2%), and consumer discretionary sectors (+14.0%) were primary drivers of benchmark performance. Broadcom and Netflix, both significant active weights in the strategy, were key contributors. Netflix saw its shares climb due to strong execution, double-digit revenue growth from subscriber expansion and pricing, and continued margin improvement. Although some profits were realized, confidence in Netflix's long-term strategy, market position, and the global streaming market remains high. Similarly, Broadcom maintained strong execution in developing custom silicon chips for AI computing, positioning it well for continued investment in AI, particularly with its collaborations with major technology companies and robust demand for Nvidia’s GPUs. Broadcom's cloud infrastructure software business is also expected to grow steadily given its established presence within enterprises.
Industrials also performed well, gaining 14.2%, buoyed by stocks related to power and electrification, such as Eaton (an out-of-benchmark holding) and Johnson Controls, which holds a dominant position in commercial HVAC for data centers. The healthcare sector, however, underperformed, falling 1.3%, amid concerns over potential tariffs on pharmaceutical imports and pressure on reimbursement rates within the Medicare Advantage market. These factors, combined with operational challenges, heavily impacted UnitedHealth Group, which missed first-quarter earnings and subsequently withdrew full-year guidance. Long-standing biotech holding Vertex Pharmaceuticals also saw declines due to softer-than-expected first-quarter revenue, primarily from European weakness and slower adoption of its next-generation cystic fibrosis treatment, Alyftrek. Nevertheless, the company's key products, including the non-opioid acute pain reliever Journavx, are anticipated to show solid growth in the latter half of the year. Thermo Fisher Scientific also lagged due to worries about spending cuts in academic/government and biopharma segments, stemming from regulatory fears related to tariffs and most-favored-nation drug pricing.
During the second quarter, ClearBridge strategically adjusted its portfolio by adding four new positions and exiting four others. In the healthcare sector, Eli Lilly, a prominent developer of GLP-1 treatments for diabetes and obesity, was replaced with its main competitor, Novo Nordisk. Despite Novo's Wegovy being the first-to-market among new obesity drugs, it lost market share to Lilly due to production scaling delays. While the initial market reaction to Novo's enhanced CagriSema weight loss treatment was unfavorable, it is viewed as a more potent formulation capable of competing effectively with Eli Lilly. With Novo’s promising product pipeline and improved supply, the company’s valuation is considered highly attractive given the significant secular growth trends in the diabesity market. Additionally, Alnylam Pharmaceuticals was added, a commercial-stage biotechnology firm and a global leader in RNA interference technology, which can selectively halt protein production at the genetic level. Alnylam’s platform of five approved drugs can treat various rare and common diseases and consistently generate new drug candidates. The market is believed to underestimate the potential value of Alnylam’s core Amvuttra franchise for a liver condition leading to heart failure, along with its early-stage pipeline assets in areas like high blood pressure and Huntington’s Disease.
In the IT sector, Synopsys and Palantir Technologies were added to the portfolio. Synopsys is a leader in electronic design automation (EDA) software and custom chip designs, operating in a duopoly market with multiple growth avenues driven by the increasing complexity of semiconductor chips. Its EDA software and tools are mission-critical and difficult to replicate, providing strong defense for its high-margin business model. Palantir is a software-as-a-service provider offering an AI-powered operating system that integrates data with existing customer applications. Palantir’s platform serves as a central hub to improve business outcomes across government and commercial markets, enabling users to synthesize diverse data sources into actionable, real-time insights. The company is highly profitable and experiencing rapid growth with gross margins exceeding 80%. Due to its elevated valuation, position size is carefully managed. After achieving margin expansion in the first half of 2024, mass market retailer Target recently encountered challenges from continued shifts in consumer spending away from discretionary categories like home goods and electronics, which constitute the majority of its sales and offer higher margins. Tariffs on Chinese imports are also expected to further pressure Target’s business. Despite the company’s efforts to protect margins in a difficult operating environment, risks are perceived to be skewed towards the downside, leading to the exit of this position. Challenges in biotech funding and government funding pressures have negatively impacted companies supporting biopharmaceutical development, such as contract research organization (CRO) ICON. This has delayed the recovery of CRO growth, even after multiple quarters of customer spending rationalization. ICON was exited due to diminishing confidence in the timing of CRO business normalization. MongoDB, a leader in modern database architecture, was also closed out of the portfolio. Its recent fundamentals were negatively affected by the timing of multi-year renewals and a more cautious IT spending environment. Decelerating growth has also fueled investor concerns about increasing competition, a bearish case difficult to refute without a clear catalyst for growth re-acceleration on the horizon.
A core objective in recent years has been to provide clients with a portfolio offering an enhanced growth profile, capable of strong upside capture in bullish markets and effective downside protection during volatile periods. The firm is enthusiastic about the new investment ideas implemented in the Strategy to achieve this goal and is encouraged by recent performance amidst significant shifts in market leadership. While the full impact of updated tariff policies with U.S. trading partners is yet to be realized globally, confidence remains high in the portfolio’s holdings, which possess strong market positions, value-based offerings, and pricing power, positioning them well to withstand tariff-related cost inflation. The macroeconomic landscape is anticipated to remain uneven, but the portfolio has been strategically aligned to perform favorably across diverse economic scenarios. With a balanced approach to growth, the portfolio comprises stocks with both offensive and defensive attributes, led by robust management teams demonstrating a proven ability to execute irrespective of broader economic conditions.