Co-managed by Regina Lombardi and Timothy Hartch, the $70.1m (£41.7m) fund aims to provide attractive absolute returns while reducing the risk of permanent capital loss in each individual investment. Ms Lombardi explains: “[We] seek to own competitively advantaged businesses that offer essential products and services to a loyal customer base, earn attractive returns on capital, and generate strong free cashflow. We want to own these high quality businesses when they are trading at a discount to our estimate of intrinsic value.”
The managers utilise BBH’s “cornerstone of equity investing” approach, which is to invest with a margin of safety in both the quality of the business and the valuation. Ms Lombardi notes: “We believe a margin of safety exists when we are able to mitigate both business risk (our business, financial, and management criteria have been met; sustainable competitive advantages exists) AND price risk (when we believe there is a significant discount to intrinsic value at the time of purchase – we aim to purchase at 75 per cent of our estimate to intrinsic value or less).”
She adds that the majority of the team’s time and resources are devoted to bottom-up security selection. “While we are aware of prevailing macroeconomic trends and circumstances and take them into consideration when analysing a company, bottom-up analysis is the primary driver of our investment process. The fund’s country allocations and sector weights are a residual of our investment process and we manage them to levels we find appropriate.”
Since launch in June 2013 the fund has lagged behind the MSCI World index with a return of 3.88 per cent against the index return of 7.71 per cent, according to FE Analytics. Still shy of its one-year anniversary, the fund has nonetheless outperformed the index across one-, three- and six-month periods to April 22 2014.
The manager notes gains in energy, banking and technology helped performance in the first quarter of the year, which offset some of the losses experienced by the fund from its exposure to retailers and the education company Pearson.
“Investor sentiment towards traditional brick-and-mortar retailers in developed markets has been extremely weak due to concerns about continued competition from Amazon and other online retailers, increased competition from discount retail formats, and continued weak consumer spending,” explains Ms Lombardi. “Pearson remains the leading global provider of educational content and solutions, but its share price fell 20 per cent in the first quarter following disappointing earnings guidance for 2014.”
Some of the positive contributors in the energy sector include the Oslo-listed seismic company, TGS Nopec, which rose by more than 23 per cent, and oil field services firm Schlumberger and Canadian independent Exploration & Production (E&P) company Vermilion Energy.
“Our two banks, Wells Fargo and Svenska Handelsbanken also performed well. Other positive contributors in the quarter included Microsoft, Novartis, and Baxter.”
On a broader outlook the manager adds that, following a “robust” 2013, global equities got off to a mixed start this year. “North American and western European equities overcame still tepid macroeconomic growth and growing geopolitical tensions to post modest gains in the first quarter, while Asian, Eastern European, and many other emerging market equities fell.”
The managers have initiated some changes in the first quarter of the year, including adding to their holding in French pharmaceutical giant Sanofi, making it one of the top five holdings.
“We also purchased shares in two new companies trading at 75 per cent or less of our intrinsic value estimates during the first quarter: Zoetis and Unilever,” explains Ms Lombardi. “Both businesses fit well with our demanding investment criteria and offer compelling long-term value creation potential driven by secular growth, strong market positioning and broad global distribution.”
Expert View
Martin Bamford, managing director, Informed Choice
“This fund invests in established global businesses which are cash-generative, providing essential goods and services. It is a reasonably concentrated fund, with only 30-40 holdings, although each has market capitalisation exceeding $3bn (£1.8bn). The fund typically holds stocks for three to five years, and has a US focus, which is quite common for global equity funds as the US is the largest global equity market. Brown Brothers Harriman is a relative unknown for UK investors and the offshore nature of this fund will make it less attractive to retail investors, who are better suited to UK-domiciled and regulated funds.”
