Buying the stocks of global companies that are able to maintain their dominant positions over extended periods, providing a unique customer experience, and delivering outstanding long-term value to shareholders, has led the USD139 million Brown Advisory Global Leaders strategy to return 27 per cent over the past 12 months.
The independent investment firm’s Fund has returned 11.4 per cent annualised since inception beating its benchmark by 4.1 per cent per annum, as it marks its three-year anniversary.
Brown Advisory attributes this outperformance to the four-step process used to identify the top 30-40 leading companies that deliver exceptional customer outcomes. In addition, the Company believes their investment process has three key differentiators which add immense value to their strategy – investigative primary research, integrated ESG analysis and behavioural analytics.
The Global Leaders team has a strict set of criteria that they adhere to in order to uncover investable opportunities.
The team has a clear checklist on which every stock is assessed. It is a simple, repeatable process that leads the team each year to complete detailed fundamental research on approximately 150 companies, from which 20-25 per cent are forensically assessed and typically 5-8 new investments made. The Fund targets a 20 per cent Return on Invested Capital (ROIC) over time and has turnover of just under 20 per cent per annum implying a holding period over five years.
Mick Dillon (pictured), portfolio manager, Global Leaders Fund, says: “We believe companies that focus on their customer first are more likely to deliver for their shareholders. We want to find out what makes a business special; what is it doing that no-one else does? If the company wasn’t around tomorrow, would its customers care? These customers buy for value, not price, and they come back again and again. High repeat business is all well and good and, of course, we look at repeat sales and cost of capital – but it is the inherent value of the service offered to the customer that is key.”
Bertie Thomson, portfolio manager on the Fund, adds: “Delivering strong performance for our investors is not just about stock selection, it is also about capital allocation. The successful combination of these two aspects of portfolio management is what drives positive absolute and relative returns.”
The team believes sustainability is a vital consideration in stock selection. Viewing companies through an ESG lens can be extremely helpful in identifying company-specific risks and in highlighting drivers of a company’s future growth that may not be readily apparent through traditional research – this in turn can lead to an informational advantage.
The Fund is invested in Unilever – a leading multinational consumer goods company. The company’s Sustainable Living Brands have been delivering top-line results for the company, growing faster than the rest of the business and accounting for over half the company’s growth. Unilever has also been successful in embedding sustainability into its supply chain practices and company culture, helping the company to operate more efficiently and reduce supply chain risks (i.e. shortages of raw materials).
Using a third-party ‘coach’ to help the portfolio managers identify persistent behaviours and actions that might detract from performance or success has become a key part of the process for the Brown Advisory team.
“We use an outside behavioural analytics firm to analyse our decisions in the same way professional athletes use coaches. It is a rare elite athlete who does not have a coach. Even Roger Federer, the best male tennis player of all time, still has a coach. What we have found is that simply ‘knowing’ about behavioural traps is not enough. We must embed rules in our process to overcome these evolutionary traits and control our behaviour, and that is where our ‘coach’ comes in,” added Mick Dillon.
The firm’s research also incorporates what its refer to as ‘investigative work’ or ‘pure primary research’. In a complex world, the team pulls together qualitative information on highly specific topics, which leads to many primary interviews to see the business from the eyes of the customer.
“Every CEO has a compelling story; how else would they get to be CEO? But you need to corroborate their views with the wider market and primary, investigative research is a key way to do so. Whether it is gleaning the view of surgeons on a healthcare product or hotel concierges about their booking engines, we are relentless in our efforts to investigate,” says Dillon