July provided some welcome relief for equity investors following a particularly challenging first half of the year. For the month, the BBH US Large Cap Equity Composite (“US Large Cap Equity” or “the Strategy”) gained 9.49% compared to a gain of 9.22% for the benchmark S&P 500 Index. This modest outperformance was driven by positive security selection in the Health Care, Consumer Staples, and Industrials sectors. On an absolute basis, the Information Technology sector rebounded sharply and was the Strategy’s largest contributor. The top performer for the period was Amazon.com (AMZN), gaining 27.06%, while the sole detractor was Progressive (PGR), declining -0.96%. There were no new purchases or sales during the month, but we increased our positions in Microsoft (MSFT) and Pool Corp (POOL) and reduced our holdings in Sherwin-Williams (SHW). At month-end, the Strategy held 30 positions and 1.49% in cash.
Following a sharp decline in the second quarter, shares of Amazon staged a strong recovery leading up to and following its second quarter report. This helped alleviate investor concerns regarding a slowdown in e-commerce growth, excess capacity in the logistics network, and the durability of Amazon Web Services’ growth in a slowing economy. While Amazon is not immune to economic cycles and its core businesses require significant capital investment, we continue to view the company as a uniquely compelling collection of secular growth businesses. With dominant market share in e-commerce and cloud computing, Amazon’s long-term strategy of reinvesting in the business sustains its competitive advantages. This strategy enables it to continue to take share from legacy formats, technologies, and competitors. Over time, we expect reported free cash flow and return on invested capital (ROIC) to better reflect the quality of Amazon’s underlying businesses.
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 to generate attractive returns. Additionally, 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 take market share as its leadership on policy rate increases and the company’s underwriting discipline supports a return to historic levels of profitability and growth.
The balance between durable economic growth and taming inflation remains fragile. July’s strong equity performance reflects a degree of incremental confidence on this front. Looking at the remainder of the year, we believe earnings growth will take center stage. Consensus estimates remain, in our view, optimistic. Our portfolio holdings are not immune to inflationary pressures or economic cycles, but we believe they are well positioned compared to the broader market. As a whole, the portfolio’s earnings growth, cash flows, and balance sheet health are superior to that of the S&P 500. Our focus remains on the long-term economic value generated by the companies in our clients’ portfolios.
