Uncertainty about the trajectory of inflation, monetary policy, and corporate profits continued to be a source of volatility during the month of August as the benchmark S&P 500 lost -4.08%, giving up almost half of the prior month’s strong gains of 9.22%. The BBH US Large Cap Equity Composite (“US Large Cap Equity” or “the Strategy”) declined -5.98% in August. The primary sources of underperformance were security selection in Health Care and Information Technology, as well as an absence of investment in the Energy sector which gained 2.83% despite a sharp correction in underlying crude prices. At the portfolio level, security selection detracted 207 basis points1 relative to the benchmark, while allocation added 15 basis points. Auto insurer Progressive Corporation (PGR, +6.6%) was the top contributor, while vision care specialist Alcon (ALC, -15.9%) was the largest detractor.
Despite a challenging operating environment, Progressive has been among the Strategy’s best performing holdings on a year-to-date and trailing 12-month basis. The defensive nature of its essential products (primarily auto insurance) and its fundamental competitive advantages based on superior data analytics and direct distribution channels leave it well-positioned in these uncertain times. While an increase in severity and frequency of claims has depressed underwriting profits on an industry-wide basis, Progressive continues to outperform its peer group and generate attractive returns. Its balance sheet remains liquid and well-capitalized with a fixed income portfolio positioned to benefit from higher rates. We continue to believe Progressive will outgrow the industry and continue to take market share as its leadership on policy rate increases, and underwriting discipline supports a return to historic levels of profitability and growth.
Alcon shares were strong ahead of its earnings announcement in early August. Sales in both Surgical and Vision Care divisions benefitted from product innovation and a continued recovery across international markets. While management maintained its 2022 organic revenue growth guidance, foreign exchange expectations were revised to a 500 basis point headwind versus the prior guidance of 300 basis points, lowering reported revenue and earnings per share (EPS) expectations for the year. Fundamentally, our thesis on Alcon remains unchanged. Eye health is one of the largest, fastest growing, and most underserved segments in healthcare, driven by an aging population, lifestyle changes, and increased access to healthcare, particularly in emerging markets. We believe Alcon’s Surgical and Vision Care businesses are well-positioned to capitalize on these opportunities.
At month-end, the Strategy held 30 securities, 47.1% in the top 10, and 2.3% in cash. There were no initiations or eliminations during the period. We added to positions in Waste Management (WM) and Graco (GGG), and reduced positions in A.J. Gallagher (AJG), Costco (COST), and Copart (CPRT). Turnover during the trailing 12 months has been approximately 23%.
