ClearBridge Growth Strategy Q4 2025 Commentary

By Evan Bauman, Aram Green & Amanda Leithe, CFA

Balance Matters When Markets Rotate – Market Overview

U.S. equities delivered resilient but volatile performance in the fourth quarter. While major indexes remained close to all-time highs, market conditions shifted meaningfully beneath the surface. Momentum-driven themes tied to artificial intelligence (AI), technology and cryptocurrencies extended into the early part of the quarter before reversing, resulting in heightened volatility and greater stock-level dispersion.

The S&P 500 Index returned 2.7% during the quarter, while the benchmark Russell Midcap Growth Index declined 3.7%. As volatility increased, investors became more selective, rewarding companies with durable fundamentals, innovation-driven growth and strong execution, while penalizing stocks where expectations had moved ahead of near-term fundamentals.

Against this backdrop, the ClearBridge Growth Strategy outperformed its benchmark in the fourth quarter, marking its third consecutive quarter of outperformance. Results reflected participation in early-quarter momentum — particularly from AI-related exposures — combined with strong downside protection as risk appetite moderated later in the period. We believe this outcome underscores the benefits of a balanced approach to growth investing.

2025 Year in Review

Looking back, 2025 was characterized by a wide range of market conditions that tested portfolio construction and reinforced the importance of discipline and flexibility. The year began with elevated uncertainty and the broad market endured a sharp correction from mid-February through early April, followed by a powerful rebound driven by enthusiasm around AI and innovation-led growth. After hitting an interim high in late October, markets became more volatile with rapid rotations and reversals putting a premium on portfolio diversity and our ability as managers to remain nimble, tactical and convicted in our decision-making.

Overall, the Strategy delivered a strong year, outperforming its benchmark by nearly 600 basis points (gross of fees). Market outcomes among the mid and large cap stocks we target increasingly reflected idiosyncratic drivers rather than broad factor exposure, rewarding companies investing in innovation, improving productivity and executing well against long-term growth opportunities.

In a market where much of the upside is priced in, stock selection matters more than ever.

Importantly, 2025 also demonstrated the benefits of a multiyear evolution of the portfolio. While our core philosophy remains unchanged after more than four decades, the Strategy today reflects a more balanced expression of growth. The steady compounders that continue to make up the base of our portfolio can provide effective downside capture for investors, while some of the disruptive growth names that have been added over the past few years have helped us better keep pace in a rising market. The portfolio is also more diversified across sectors and subsectors to better balance conviction with risk management. We believe this positioning has improved the portfolio’s resilience while preserving its ability to capture long-term upside for clients.

Quarterly Performance

Fourth-quarter outperformance was driven by a combination of balanced portfolio construction and strong stock selection. Early in the quarter, momentum tied to AI and technology supported results, while the portfolio’s exposure to steadier compounders and defensive growth names helped protect performance as volatility increased.

Within IT, Shopify (SHOP), an e-commerce platform that enables merchants to operate and scale digital storefronts, benefited from continued adoption by larger enterprises and improving monetization across its ecosystem. Broadcom, a leading semiconductor company and long-term holding, continued to execute well amid strong demand for custom silicon supporting AI workloads. TE Connectivity (TEL), an electronic component manufacturer specializing in connectivity and sensor solutions, also contributed, supported by secular trends in its automotive and industrial businesses.

While communication services was the greatest detractor within the benchmark, our differentiated positioning supported relative outperformance. For example, a number of portfolio holdings in sports and live media, such as Madison Square Garden Sports (MSGS), Madison Square Garden Entertainment (MSGE) and TKO Group (TKO), were positive contributors in the quarter.

However, select holdings in consumer staples and health care did face pressure. Following a period of strong performance, shares of e.l.f. Beauty (ELF), a cosmetics company focused on affordable, digitally native products, declined as sales growth was hurt by management’s decision to stop shipments to retailers that were slow to pass through tariff-related price increases. That said, we are encouraged that consumption trends for the brand remain healthy and management is already seeing shipment growth recover in the current quarter. In health care, Doximity, a digital platform serving medical professionals, traded lower as higher-beta growth stocks within health care experienced renewed volatility.

Positive contributions from steadier growth holdings helped to offset these pressures. In the consumer discretionary sector, TJX Companies (TJX), an off-price retailer, delivered solid third-quarter results and had a strong start to the fourth quarter as better merchandise availability yielded broader and higher-quality assortments that supported traffic, same-store sales and earnings growth. Our consumer performance also benefited from the recent addition of On Holding (ONON), a premium athletic footwear and apparel company gaining share globally. On Holding delivered an impressive quarter punctuated by strong growth in international markets, such as China, as well as accelerating growth from apparel. Likewise, within health care, top individual contributor Vertex Pharmaceuticals (VRTX) benefited from growing optimism around its kidney disease pipeline and continued to demonstrate the value of idiosyncratic, innovation-driven growth.

Portfolio Positioning

Overall, 2025 was a period of strong idea generation that saw the Strategy reallocate capital toward opportunities with more attractive risk-reward profiles. These included new positions in merchant power producer Vistra (VST), biotech company Alnylam Pharmaceuticals (ALNY) and global hospitality company Hilton (HLT), among others. Staying true to our sell discipline, we also exited a number of holdings where we had diminished conviction in the company’s growth outlook such as health care provider UnitedHealth Group and audiovisual technology company Dolby.

Additionally, we looked for opportunities to elevate the quality of the portfolio. Within industrials, for instance, we rotated our exposure in the fourth quarter from Old Dominion Freight Line, a leading less-than-truckload (LTL) carrier, into XPO (XPO), the fourth-largest LTL provider in North America. We remain mindful of the still-challenging macro environment for freight and see greater idiosyncratic growth potential at XPO. Under new leadership, the company is improving service levels, pricing discipline and margins, leaving more room for outperformance should macro malaise persist.

We also continued to use our profitable larger positions in Broadcom (AVGO) and Robinhood Markets (HOOD) to opportunistically fund more attractively valued holdings. Most recently this included adds to Freeport-McMoRan (FCX), a global copper producer and one of our top contributors for the quarter, following a price drawdown related to an operational incident late in the third quarter. We believe management handled the situation effectively, and the dislocation reinforced our view that duration can be an advantage when owning high-quality assets tied to long-term secular demand.

Outlook

Our outlook remains consistent with what we articulated earlier in the year — and importantly, what played out in the fourth quarter. Markets remain resilient, but volatility has increased as momentum-driven areas cooled and stock-level dispersion widened, reinforcing the importance of disciplined stock selection and a balanced approach to portfolio construction.

AI continues to represent a powerful long-term opportunity, though early beneficiaries such as semiconductors and infrastructure have already seen significant gains. We are focused on making sure we have not only the right exposure within the AI complex but also other offensive bets in the portfolio to position the Strategy well should market leadership broaden further. At the same time, we continue to emphasize balance, owning companies not only with offensive growth potential but also defensive characteristics built on strong free cash flow, clean balance sheets and proven management teams, which should help to protect the portfolio should the environment weaken.

We remain opportunistic — taking advantage of pockets when stocks are oversold and trimming when enthusiasm runs ahead of fundamentals — while staying committed to a bottom-up, high active share, and long-term-oriented approach. We believe this discipline positions the Strategy well to navigate continued volatility, identify durable winners beyond broad market trends, and drive long-term performance for clients.

Portfolio Highlights

The ClearBridge Growth Strategy outperformed its Russell Midcap Growth Index during the fourth quarter. On a relative basis, the Strategy had positive contributions from two of the nine sectors in which it was invested. The contributors were the consumer discretionary and materials sectors, while the consumer staples and information technology (IT) sectors detracted the most.

On a relative basis, overall stock contributed to performance, while sector allocation effects detracted. Stock selection in the IT, communication services and consumer discretionary sectors, as well as an overweight to the materials sector, benefited performance. Conversely, stock selection in the consumer staples, financials and health care sectors, overweights to the communication services and IT sectors and an underweight to the consumer discretionary sector weighed on performance.

On an individual stock basis, the biggest contributors to relative returns were Vertex Pharmaceuticals, Broadcom, Freeport-McMoRan, TE Connectivity and an underweight to Roblox (RBLX). The largest detractors from relative returns were e.l.f. Beauty, Doximity, Robinhood Markets and a lack of exposure to Rocket Lab (RKLB) and Expedia (EXPE).

Evan Bauman, Managing Director, Portfolio Manager

Aram Green, Managing Director, Portfolio Manager

Amanda Leithe, CFA, Managing Director, Portfolio Manager

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