4Q Highlights
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Market Overview
The S&P 500 staged a strong fourth quarter rally in response to moderating inflation, resilient consumer spending, stable interest rates, a declining Dollar, and a reversal of China’s zero-COVID policy. Market breadth was positive with nine of the 11 S&P 500 sectors advancing, led by the Energy, Industrials, and Materials sectors. Consumer Discretionary and Communication Services sectors were areas of relative weakness, reflecting continuing inventory imbalances, uncertainty around evolving consumer behavior, and moderating advertising spending. The market’s focus has turned to earnings durability in the context of moderating economic conditions, elevated inflation, restrictive monetary policy, lingering supply chain imbalances, and tight labor markets. Without a clear sense of the ultimate impact of the Federal Reserve’s historic actions, uncertainty remains high, raising the likelihood of continuing volatility.
| Performance BBH U.S. Large Cap Equity Composite As of December 31, 2022 |
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|---|---|---|---|---|---|---|---|
| Total Returns | Average Annual Total Returns | ||||||
| 3 Mo.* | YTD | 1 Yr. | 3 Yr. | 5 Yr. | 10 Yr. | Since Inception |
|
| Gross of Fees | 9.27% | -20.10% | -20.10% | 5.20% | 7.16% | 9.91% | 9.57% |
| Net of Fees | 9.01% | -20.91% | -20.91% | 4.16% | 6.10% | 8.82% | 8.49% |
| S&P 500 | 7.56% | -18.11% | -18.11% | 7.66% | 9.42% | 12.56% | 9.00% |
* Returns are not annualized. 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. Sources: BBH & Co. and S&P |
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Portfolio Commentary
The BBH U.S. Large Cap Equity Strategy (“the Strategy”) gained 9.27% in the fourth quarter compared to 7.56% for the benchmark S&P 500 Index. At the portfolio level, outperformance was driven by positive security selection in the Information Technology and Consumer Discretionary sectors, as well as an overweight allocation to the Financial Services sector. At the security level, top contributors included Mastercard (MA), NIKE (NKE), and Linde (LIN). On the other hand, primary detractors were Amazon.com (AMZN), Alphabet (GOOG), and Signature Bank (SBNY). At quarter-end, the portfolio held 29 securities, 48% in the top 10, 2% in cash, and traded at 77% of our estimate of intrinsic value.1 Activity during the period was modest with additions to Booking Holdings (BKNG), Celanese (CE), Texas Instruments (TXN), and Signature Bank (SBNY). Shares of Pool Corp (POOL) were fully redeemed.
We sold our investment in industrial distributor POOL for several reasons despite being an excellent fit with our fundamental investment criteria. First, we wanted to reduce exposure to the U.S. residential and commercial real estate markets given current and potential changes to monetary policy. U.S real estate fundamentals have only just begun to deteriorate, and the risk of further weakening is significant. Second, while the quality and resiliency of the company’s business has improved over the past 15 years, we believe management’s outlook in a recessionary environment is overly optimistic. During the last real estate-led recession, POOL’s revenues and profits declined 20% and 45%, respectively. While we do not believe such a level of operating degradation would be repeated, the company’s suggestion seems optimistic that top line and profit declines would range in the low-to-high single-digit range should a normal recessionary environment develop in 2023. In short, the near-to-medium term operating environment appears challenging, and we believe it is prudent to move to the sidelines.
Outlook
While we are encouraged to see equities and the Strategy recover from mid-October lows, we recognize 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 businesses characterized by durable cash flow and earnings growth, healthy balance sheets, and attractive valuations. From this perspective, we believe the Strategy is well-positioned to generate attractive returns and preserve capital through the business cycle.
| Holdings Representative Account As of December 31, 2022 |
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|---|---|
| Berkshire Hathaway Inc (Class A) | 6.8% |
| Mastercard Inc | 5.7% |
| Alphabet Inc (Class C) | 5.6% |
| Linde PLC | 5.0% |
| Arthur J Gallagher & Co | 4.7% |
| Progressive Corp | 4.2% |
| Microsoft Corp | 4.2% |
| Alcon Inc | 4.1% |
| Waste Management Inc | 3.6% |
| Thermo Fisher Scientific Inc | 3.6% |
| Zoetis Inc | 3.6% |
| KLA Corp | 3.5% |
| Costco Wholesale Corp | 3.3% |
| NIKE Inc (Class B) | 3.3% |
| Dollar General Corp | 3.0% |
| Oracle Corp | 3.0% |
| Booking Holdings Inc | 2.8% |
| Copart Inc | 2.8% |
| Graco Inc | 2.7% |
| Texas Instruments Inc | 2.6% |
| Abbott Laboratories | 2.6% |
| Celanese Corp | 2.6% |
| S&P Global Inc | 2.5% |
| A. O. Smith Corp | 2.3% |
| Diageo PLC ADR | 2.2% |
| Adobe Inc | 2.1% |
| Amazon.com Inc | 1.9% |
| Nestle SA ADR | 1.8% |
| Signature Bank | 1.8% |
| Cash & Cash Equivalents | 2.0% |
| Holdings are subject to change. |
|
| Representative Account Equity Weighting As of December 31, 2022 |
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|---|---|
| Common Stock | 98.0% |
| Cash and Cash Equivalents | 2.0% |
| Total | 100.0% |
| Representative Account Sector Weighting As of December 31, 2022 |
|
|---|---|
| Communication Services | 5.7% |
| Consumer Discretionary | 11.3% |
| Consumer Staples | 7.5% |
| Energy | 0.0% |
| Financials | 20.3% |
| Health Care | 14.2% |
| Industrials | 11.6% |
| Information Technology | 21.6% |
| Materials | 7.7% |
| Real Estate | 0.0% |
| Utilities | 0.0% |
| Total | 100.00% |
| Reported as a percentage of portfolio securities, excluding Cash and Cash Equivalents. | |
| Representative Account Top 10 Companies As of December 31, 2022 |
|
|---|---|
| Berkshire Hathaway Inc | 6.8% |
| Mastercard Inc | 5.7% |
| Alphabet Inc | 5.6% |
| Linde PLC | 5.0% |
| Arthur J Gallagher & Co | 4.7% |
| Progressive Corp | 4.2% |
| Microsoft Corp | 4.2% |
| Alcon Inc | 4.1% |
| Waste Management Inc | 3.6% |
| Thermo Fisher Scientific Inc | 3.6% |
| Total | 47.6% |
| Reported as a percentage of total portfolio. | |
| Representative Account Portfolio Characteristics As of December 31, 2022 |
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|---|---|
| Composite Assets (mil) | $825.9 |
| Number of Securities Held | 29 |
| Average P/E | 26.5 |
| Average Market Cap (bil) | $240.4 |
| Turnover (Rolling 12-Months) | 25.84% |
| Excludes cash equivalents. | |
1 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.
Intrinsic value is an estimate of the present value of the cash that a business can generate and distribute to shareholders over its remaining life.
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.
Contribution figures are presented gross of fees and do not include cash and cash equivalents.
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 fund'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 to returns is of the Representative Account. The 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. 2023. All rights reserved.
Not FDIC Insured No Bank Guarantee May Lose Money
IM-12301-2023-01-25 Exp. Date 04/30/2023
