Equity markets rebounded sharply in October, reflecting a relative moderation of inflationary factors, stability in the U.S. Dollar and 10-Year Treasury yields, as well as satisfactory corporate earnings. The BBH US Large Cap Equity Composite (“US Large Cap Equity” or “the Strategy”) gained 6.18% for the month compared to 8.10% for the S&P 500. From an attribution perspective, key contributors were Information Technology selection and an overweight position in Financials. Primary detractors included security selection in the Health Care sector and a lack of investment in Energy – a sector that outperformed all other sectors by a wide margin with a gain of almost 25% for the month. At the security level, top contributors included Mastercard (15.61%), Oracle (28.49%), and Berkshire Hathaway (9.49%). Primary detractors included Amazon.com (-9.35%), Pool Corp (-6.18%), and Alphabet (-1.55%). At month-end, the Strategy held 29 securities, 46.5% in the top 10, and 6.3% in cash. Turnover during the trailing 12 months was approximately 25%.
Early in the month we increased our position in leading online travel agency Booking Holdings (BKNG). Demand trends for travel, particularly leisure travel, remain healthy despite elevated inflation and high hotel occupancy rates. Excellent cost controls and a strong pricing environment continue to benefit company margins and we are pleased with management’s substantive share repurchase program; year-to-date, the company has repurchased $4.8 billion in shares, reducing its outstanding shares by 5%. Over the last five years, the share count has declined by 20% and we are encouraged that management is deploying cash in a way we expect will generate considerable long-term shareholder value.
We sold our investment in industrial distributor Pool Corp (POOL). We decided to exit the position for several reasons despite the company being an excellent fit with our investment criteria. First, we wanted to reduce our portfolio 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 material weakening is significant. Second, while we have high conviction the quality and resiliency of the company’s business has improved over the past 15 years, we believe their financial performance guidance 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 that top line and profit declines would range in the low-to-high single-digit range should a normal recessionary environment develop in 2023, seems optimistic. In short, the near-to-medium term operating environment appears challenging, and we believe it is prudent to move to the sidelines.
Our focus remains on earnings and cash flow durability. Like the market, we are pleased to see some moderation of inflation, but acknowledge the fact that these factors remain extremely elevated. We recognize the Federal Reserve’s tools are limited and imprecise with the ability to produce a wide range of outcomes, but take comfort in the view that our clients’ portfolios are well-positioned to endure and potentially even thrive through a full cycle.