Equities continued an impressive recovery from the mid-October 2022 lows through January 2023. The S&P 500 gained 6.28% for the month after benefiting from moderating inflation, a pause in interest rates, and a stable U.S. Dollar. The BBH US Large Cap Equity Composite (“US Large Cap Equity” or “the Strategy”) modestly outperformed the benchmark with a gain of 7.02%. At the sector level, the Information Technology and Consumer Discretionary sectors were the Strategy’s strongest contributors while the Consumer Staples and Materials sectors lagged but were also positive. At the security level, the portfolio exhibited broad-based strength with top contributors including Alphabet (GOOG), Booking Holdings (BKNG), and Celanese (CE). The sole detractors were comprised of more defensive holdings such as Dollar General (DG), Waste Management (WM), and Diageo (DEO). At the portfolio level, both allocation (+23 basis points1) and security selection (+57 basis points) were positive. It was an active month where we added to positions in Waste Management (WM) and Oracle (ORCL), while reducing positions in Progressive (PGR), A. J. Gallagher (AJG), Mastercard (MA), KLA Corp. (KLAC), and Alphabet (GOOG). The portfolio concluded the month with 29 holdings, 2% cash, and a price to our estimate of intrinsic value2 of 81%.
While it is fair to attribute some of Alphabet’s January share recovery to the broad-based reflex rally in the prior year’s hard-hit Information Technology and Communication Services sectors, it is also important to recognize the company’s increasing cost discipline, strong operating performance, and compelling valuation. Notwithstanding the prior year’s 39% stock decline, Alphabet delivered 2022 revenues of $283 billion, up 10% year-over-year, or 14% on a constant currency basis. The company generated free cash flow of $60 billion and repurchased a total of $59 billion of shares. Despite near-term challenges in the macro environment, we continue to have high conviction in Alphabet’s ability to deliver durable growth through its dominance in search, mobile operating systems, strong positioning in the fast-growing public cloud market, and a broad portfolio of under monetized assets.
Following strong performance in 2022, Dollar General’s share price declined approximately 5% in January due to various factors we believe will not alter the long-term investment opportunity. A mixed shift towards lower margin consumables, unfavorable weather, and supply chain headwinds continue to weigh on near-term fundamentals. Additionally, Dollar General’s defensive credentials as a retailer of food and other consumables has contributed to some derating as market sentiment shifts. We continue to believe Dollar General remains well positioned to serve its customers through a unique combination of value and convenience. This is especially true in a more challenging economic environment with the right assortment, price points, and initiatives to drive growth for the long-term.
We welcome the strong start to the year, but acknowledge it has been, and will likely continue to be, a challenging investment environment characterized by persistent inflation, higher interest rates, elevated geopolitical tensions, and slowing economies around the globe. Our focus remains on investing in businesses characterized by durable cash flow and earnings growth, healthy balance sheets, and attractive valuations. We believe the Strategy continues to represent compelling value and is well-positioned to generate attractive returns through the business cycle.
| Performance |
|||||||||
|---|---|---|---|---|---|---|---|---|---|
Total Returns |
Average Annual Total Returns |
||||||||
As of 01/31/2023 |
1 Mo.* |
3 Mo.* |
YTD* |
1 Yr. |
3 Yr. |
5 Yr. |
10 Yr. |
Since Inception |
|
BBH US Large Cap Equity Composite (Gross of Fees) |
7.02% |
10.14% |
7.02% |
-7.59% |
7.36% |
7.25% |
10.08% |
9.95% |
|
BBH US Large Cap Equity Composite (Net of Fees) |
6.94% |
9.87% |
6.94% |
-8.52% |
6.30% |
6.19% |
8.99% |
8.87% |
|
S&P 500 Index |
6.28% |
5.76% |
6.28% |
-8.22% |
9.88% |
9.54% |
12.68% |
9.34% |
|
As of 12/31/2022 |
1 Mo.* |
3 Mo.* |
YTD |
1 Yr. |
3 Yr. |
5 Yr. |
10 Yr. |
Since Inception |
|
BBH US Large Cap Equity Composite (Gross of Fees) |
-4.60% |
9.27% |
-20.10% |
-20.10% |
5.20% |
7.16% |
9.91% |
9.57% |
|
BBH US Large Cap Equity Composite (Net of Fees) |
-4.68% |
9.01% |
-20.91% |
-20.91% |
4.16% |
6.10% |
8.82% |
8.49% |
|
S&P 500 Index |
-5.76% |
7.56% |
-18.11% |
-18.11% |
7.66% |
9.42% |
12.56% |
9.00% |
|
* Returns are not annualized. The BBH US Large Cap Equity Composite inception date is 10/01/2005. |
Sources: BBH & Co. and S&P |
||||||||
Past performance does not guarantee future results. The S&P 500 is an unmanaged weighted index of 500 stocks providing a broad indicator of stock price movements. The composition of the index is materially different than the Strategy’s holdings. The index is not available for direct investment. |
|||||||||
| Representative Account Equity Weighting As of January 31, 2023 |
|
|---|---|
Common Stocks |
97.6% |
Cash & Cash Equivalents |
2.4% |
Total |
100.0% |
| Representative Account Sector Weighting As of January 31, 2023 |
|
|---|---|
Communication Services |
5.3% |
Consumer Discretionary |
11.7% |
Consumer Staples |
7.6% |
Energy |
0.0% |
Financials |
19.7% |
Health Care |
14.3% |
Industrials |
12.1% |
Information Technology |
21.4% |
Materials |
7.9% |
Real Estate |
0.0% |
Utilities |
0.0% |
Total |
100.0% |
Reported as a percentage of portfolio securities, excluding Cash and Cash Equivalents. |
|
| Representative Account Top 10 Companies As of January 31, 2023 |
|
|---|---|
Berkshire Hathaway Inc |
6.3% |
Mastercard Inc |
5.6% |
Alphabet Inc |
5.2% |
Linde PLC |
4.8% |
Arthur J Gallagher & Co |
4.5% |
Alcon Inc |
4.3% |
Microsoft Corp |
4.1% |
Progressive Corp |
3.9% |
Waste Management Inc |
3.7% |
Zoetis Inc |
3.7% |
Total |
46.2% |
Reported as a percentage of total portfolio. |
|
1 One “basis point” or “bp” is 1/100th of a percent (0.01% or 0.0001).
2 BBH’s estimate of the present value of the cash that a business can generate over its remaining life.
Holdings are subject to change. Totals may not sum due to rounding.
Price/Earnings (P/E) ratio is a company’s current share price divided by earnings per-share.
Turnover ratio is the rate of trading in a portfolio; higher values imply more frequent trading.
Opinions, forecasts, and discussions about investment strategies represent the author’s views as of the date of this commentary and are subject to change without notice. References to specific securities, asset classes, and financial markets are for illustrative purposes only and are not intended to be, and should not be interpreted as recommendations.
Purchase and sale information provided should not be considered as a recommendation to purchase or sell a particular security and that there is no assurance, as of the date of publication, that the securities purchased remain in a strategy’s portfolio or that securities sold have not been repurchased.
RISKS
Investors should be able to withstand short-term fluctuations in the equity markets in return for potentially higher returns over the long term. The value of portfolios changes every day and can be affected by changes in interest rates, general market conditions and other political, social and economic developments. Each investor should evaluate their ability to invest for the long-term, especially during periods of downturn in the market.
The strategy may assume large positions in a small number of issuers which can increase the potential for greater price fluctuation.
Foreign investing involves special risks including currency risk, increased volatility, political risks, and differences in auditing and other financial standards.
The Representative account is managed with the same investment objectives and employs substantially the same investment philosophy and processes as the strategy. Contribution figures are of the Representative Account and do not include cash and cash equivalents. Performance of the Representative account is available upon request.
Brown Brothers Harriman Investment Management (“IM”), a division of Brown Brothers Harriman & Co (“BBH”), claims compliance with the Global Investment Performance Standards (GIPS®). GIPS® is a registered trademark of CFA Institute. CFA Institute does not endorse or promote this organization, nor does it warrant the accuracy or quality of the content contained herein. To receive additional information regarding IM, including a GIPS Composite Report for the strategy, contact Craig Schwalb at (212) 493-7217, or via email at craig.schwalb@bbh.com.
Gross of fee performance results for this composite do not reflect the deduction of investment advisory fees. Actual returns will be reduced by such fees. Net of fees performance results reflect the deduction of the maximum investment advisory fees. Returns include all dividends and interest, other income, realize and unrealized gain, are net of all brokerage commissions and execution costs. Results will vary amount client accounts. Performance calculated in U.S. dollars.
The Composite is fully discretionary, fee-paying accounts over $5 million that invest in a portfolio of approximately 25-35 companies with market capitalizations greater than $5 billion that are headquartered in North America, as well as in certain global firms located in other developed regions. This strategy is benchmarked to the S&P 500 Index.
Brown Brothers Harriman & Co. (“BBH”) may be used as a generic term to reference the company as a whole and/or its various subsidiaries generally. This material and any products or services may be issued or provided in multiple jurisdictions by duly authorized and regulated subsidiaries. This material is for general information and reference purposes only and does not constitute legal, tax or investment advice and is not intended as an offer to sell, or a solicitation to buy securities, services or investment products. Any reference to tax matters is not intended to be used, and may not be used, for purposes of avoiding penalties under the U.S. Internal Revenue Code, or other applicable tax regimes, or for promotion, marketing or recommendation to third parties. All information has been obtained from sources believed to be reliable, but accuracy is not guaranteed, and reliance should not be placed on the information presented. This material may not be reproduced, copied or transmitted, or any of the content disclosed to third parties, without the permission of BBH. All trademarks and service marks included are the property of BBH or their respective owners. © Brown Brothers Harriman & Co. 2022. All rights reserved.
Not FDIC Insured No Bank Guarantee May Lose Money
IM-12496-2023-03-01 Exp. Date 04/30/2023
