Brown Advisory US Sustainable Growth Fund has been added to the Direct Investment Service Preferred List, our curated list of preferred investments for new investment across the major sectors. The fund aims to achieve capital growth by investing in shares of US companies, with the managers, Karina Funk and David Powell, selecting a concentrated portfolio using three criteria: Fundamental strength, long-term sustainability and attractive valuations.
Philosophy and approach
The managers prioritise steady over rapid growth when assessing company prospects. Qualities they look for include strong, experienced management teams, leadership positions in industries with high barriers to entry, highly visible revenue streams, and good capital allocation decisions made over time.
One of the managers’ means of discerning whether companies are likely to outperform the broad market over the long term is to look for an eminently sustainable business model. They refer to specific sustainability ‘drivers’ as Sustainable Business Advantages or ‘SBAs’, which represent ways companies can improve their financial position over time. These include helping to drive productivity and efficiency for themselves or customers, increasing customer loyalty, elevating brand reputation, and improving employee engagement, retention and recruitment.
Underpinning this is a philosophy that companies with management teams that make the right investment decisions for the company’s long-term sustainability will compete and continue to thrive for decades to come. The managers suggest that ‘SBAs’ are not a typical consideration of traditional investment managers. As a result, they believe there are stock market inefficiencies they can exploit, helping drive their returns.
In nearly every sector of the economy they believe there are complexities that may result in threats to the sustainability of a business. Whether it is large energy companies worried about how they can increase efficiencies to save costs and weather the storms of commodity price volatility, or food and beverage companies concerned about how they can ensure clean water and safe ingredients in their supply chain. These risks are easily identified, but by digging deeper and finding companies’ sustainable advantages they believe they can pinpoint those that are proactively solving these critical problems and, as a result, provide the most compelling investment opportunities available.
Technology is an influential sector for the fund, and it’s an area the managers spend a lot of time thinking about in conjunction with their analyst team. Exposure is primarily through the software and semiconductors subsectors. The managers describe software companies as having “some of the strongest business models we can find” but come at high prices, so the team are careful to stick to those with the most unique, durable competitive advantages. The team are prepared to be extremely patient when buying into shares in the companies they like – for instance when they consider the valuation to be too high. For instance, a recently added holding, ServiceNow, was researched and monitored for three years prior to purchase.
Socially Responsible Investing (SRI) credentials
As part of the process a team of analysts carry out ESG (environmental, social and governance) research in order to develop a proprietary view on over 30 factors, including:
- Environmental impacts/benefits of a company’s operations, distribution systems and facilities
- Quality of the company’s environmental policy, safety policy and other management systems
- The company’s track record of compliance with environmental regulations, and the potential for future violations
- Quality of the company’s resource management practices – level of consumption of raw materials, efficient use and reuse of materials, effective management of waste streams
- The company’s reputational risks relating to ESG issues
This is a ‘sustainable’ fund, not a strict exclusions-based strategy. It does, however, screen out some of the more controversial sectors, including those that generate a high proportion of revenues from military equipment, alcohol or tobacco products, adult entertainment and gambling. It also won’t invest in companies that conduct animal testing for non-medical purposes, or those that own fossil fuel reserves or utilities that generate power from fossil fuels.
For those wishing to invest in a socially responsible manner, any fund should be carefully considered to see if it fits individual principles as well as investment objectives.
We like the research-intensive nature of the Brown Advisory team and high conviction way in which the portfolio is managed. Since inception in April 2017, the fund has ridden something of a wave of ‘growth’ stocks outperforming ‘value’ and an increasing desire for socially responsible investing, albeit less so in the US market. However, the managers’ stock selection has also added value.
Investors can expect the portfolio to be invested in solid and reliable business, but that are trading at higher valuations than the broader market. The fund would therefore likely underperform, perhaps significantly so, should ‘value’ investments enjoy a resurgence. The fund also carries heavy exposure to the healthcare and technology sectors and weakness in one of these could also make for an uncomfortable period of performance, especially given the concentrated nature of the portfolio, which is typically only 30 to 40 stocks.
Nothing on this website should be construed as personal advice based on your circumstances. No news or research item is a personal recommendation to deal.
Brown Advisory US Sustainable Growth – added to the Preferred List
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