Equity markets moved higher in the third quarter, continuing the recovery that began March 23 and in aggregate fully recovering the market declines of the first quarter. The MSCI World index registered a gain of 7.93% in the third quarter and is up 1.70% year-to-date. BBH Global Equity1 “the Strategy”) gained 9.11% in third quarter and is down (0.70%) year-to-date.

Across most of the Global Equity portfolio, reported operating results and management outlooks issued during the quarter were better than expected, with signs of stabilization among the companies most impacted by COVID-19 lockdowns and restrictions. Management commentary remains generally cautious with respect to the economic outlook and most companies are maintaining a tight rein on operating costs. Despite near-term uncertainty, we are pleased that many of our portfolio companies continue to invest behind their long-term competitive advantages. We see valuation upside in businesses that are directly disrupted by COVID-19 and where the pace of recovery may be bumpy until the virus is fully under control. We have added to several of these positions given our confidence in their medium to long-term prospects, supported by robust balance sheets and liquidity positions. Conversely, the share prices of companies that are less impacted by COVID-19 or that have benefited from the pandemic have outperformed, which prompted us to trim several of those positions during the quarter. In addition to these opportunistic adds and trims, we were relatively active during the quarter and initiated three new investments to the portfolio, funded by the exit of three positions.

BBH Global Core Equity Composite Gross and Net of Fees versus the MSCI World Index benchmark as of September 30, 2020

Our largest positive contributor in the quarter was Copart which rose by 26.3% in the quarter and has gained 15.6% year-to-date. The company is a leading processor of vehicles deemed a “total loss” by insurance companies and operates an online auction platform that links buyers and sellers of salvaged vehicles. Copart reported strong results during the quarter despite the negative effect COVID-19 has had on miles driven and salvage volume. Accident frequency and total loss frequency have increased during this period, as insurance carriers are choosing to “total” cars with lesser damage than before. Average selling prices at auction increased significantly as Copart leveraged its growing international base of buyers and its inventory of newer cars with less damage. This strong pricing dynamic supports higher operating margins as well. Copart has a very strong balance sheet and is highly cash generative, which allows the company to continue to invest in the business, reinforce its competitive strengths, and positions it well for future growth.

Zoetis, the industry leader in essential health products for companion and production animals, appreciated by 20.8% in the third quarter, bringing its year-to-date gain to 25.5%. The company reported strong operating results in August and management raised guidance for the full year reflecting less of a COVID-19 headwind than previously expected, with growth in the companion animal side of the business offsetting weakness in the U.S. livestock market. The U.S. livestock business was pressured by supply chain disruptions caused by reduced animal processing capacity as well as the pandemic-driven shift from restaurants and foodservice to in-home consumption. Weakness in U.S. livestock was offset by growth in the production animal business outside of the U.S. and strong performance in the companion animal business, driven by a faster than expected recovery in the U.S. veterinary market. We view animal health as a very attractive market, with demographic trends supporting attractive long-term growth. Zoetis’ cash flow and balance sheet remain strong, affording management the ability to invest in the business internally and via mergers and acquisitions (M&A), and we believe its innovation pipeline positions the company well to sustain above market growth rates.

Nike, the largest seller of athletic footwear and apparel in the world, was a strong contributor to performance in the third quarter with a gain of 28.3% and is our strongest contributor year-to-date with a gain of 42.8%. Nike is a new investment that we added to the Strategy during the first quarter of 2020. Nike’s operating performance during its fiscal quarter ending in August showed a strong sequential recovery in its business and flat year-over-year organic sales growth, a significant improvement from the sharp decline in the previous quarter. Consumer shifts towards spending more time at home and reducing out-of-home expenditures are supportive of Nike near-term. Led by the company’s new CEO, the management team is accelerating longer-term initiatives to meet consumer demand by rapidly adjusting the business towards e-commerce, driving higher engagement on its mobile platforms, and sharpening marketing and innovation. We view Nike as uniquely positioned to continue to take share in a growing

and attractive market by leveraging its playbook of product innovation, marketing, and customer experience, enhanced by the new CEO’s mission to bring technology to every aspect of the company’s operations.

Our investment in KBC Group, a bancassurance company domiciled in Belgium, declined by (12.5%) this quarter and is down (33.3%) year-to-date. The shares were pressured after the European Central Bank instructed Eurozone banks to postpone dividend payments and share repurchases to ensure banks have adequate capital to weather the ongoing pandemic. As one of the best-capitalized banks in the Eurozone, KBC is likely to resume dividend payments as soon as regulators allow distributions again, which we expect to happen early next year. We view this regulator-imposed dividend suspension as temporary and does not impair our long-term investment thesis on KBC. KBC is a unique franchise which offers retail banking, life and property insurance, asset management, and other financial services primarily in Belgium and the Czech Republic, two disciplined banking markets in which KBC has leading positions. KBC is likely to emerge from the pandemic with a robust balance sheet, a stronger competitive position, and a more attractive geographic footprint than most other financial services companies.

Global Core Select holdings listing as of September 30, 2020.

FleetCor Technologies, a leading provider of specialized fuel cards and workforce payment cards, was a detractor from performance in the third quarter with a share price decline of (5.3%) and (17.3%) year-to-date. FleetCor reported second quarter operating results in August and, as we anticipated, the negative impact from COVID-19 related pressures increased sequentially. Management commentary indicated stabilization across much of the business. However, the pace of recovery is expected to skew towards larger customers as small-medium sized customers (SMB) will be slower to rebound and as the company has tightened credit in some cases. Revenues declined in the company’s fuel card business as expected, but corporate payments were weaker due to a significant slowdown in travel and entertainment (T&E) cards. However, we believe FleetCor can more than offset ongoing weakness in T&E cards with growth in other specialized products, such as the company’s accounts payable automation products. We view FleetCor’s customer retention rate of 91% as an indication that the company’s revenue decline is a function of SMB client softness and related lower fuel and corporate payments volumes, rather than changes in competitive intensity. In our view, the company maintains a strong position in an attractive and consolidating industry, and a financial position that enables significant reinvestment opportunities for growth including acquisitions.

Heineken’s shares declined by (4.8%) in the third quarter and (18.5%) year-to-date. The business was significantly impacted by COVID-19 in the second quarter, especially in Western Europe due to pub closures, and the company’s vertical integration in that market led to negative operating leverage as reflected in their first half operating results. Government-mandated shutdowns of breweries in key markets such as Mexico and South Africa also pressured results. These pressures have eased as the on-premise channel has largely re-opened in Europe and breweries in Mexico have resumed operations, and Heineken’s other key markets such as Vietnam have been quite resilient. While we anticipate that sales in bars and restaurants will remain subdued and subject to COVID-related shutdowns, we expect operating performance to improve in the second half and into next year. Importantly, the current operating environment does not alter our investment thesis for Heineken given its strong #2 position with an attractive brand portfolio in the consolidated global beer market, meaningful exposure to emerging markets with high long-term growth potential, a healthy balance sheet and attractive free cash flow characteristics. Additionally, the management team, under the leadership of a new CEO, is sharpening its focus on cost management and operational efficiency while maintaining the benefits of a decentralized organizational structure. We took advantage of the price decline in Heineken to add to our position during the quarter.

We added three new investments to the Strategy during the third quarter: Shiseido, Amazon, and Visa. Shiseido is a leading Japanese cosmetics company, the third largest prestige beauty company in the world, and is a strong fit with our investment criteria. The global beauty market is structurally attractive, particularly the prestige skin care segment as brands with heritage, efficacy and authenticity command a price premium, and barriers to entry are high since the category requires significant brand investment. Additionally, the cosmetics category has demonstrated resilience through economic cycles as products are relatively low-ticket expenditures and lend themselves to repeat purchases. Shiseido derives the majority of sales and virtually all of its profit from its Asian operations, including leading positions in Japan and China. China is the second largest beauty market in the world and offers strong long-term growth potential as per capita consumption is still quite low relative to other countries. Shiseido also has the potential to improve its financial performance as margins and profitability have historically been below global peers. The company’s CEO has been in the role for six years and stepped up investment in China and Japan, restructured costs, rationalized the portfolio, and reallocated resources to prestige brands during his tenure, which has resulted in a significant improvement in sales and margins. Although this transformation was disrupted by COVID-19, as inbound tourism from China to Japan and travel retail came to a halt, management has a clear roadmap and levers to improve margins and returns over the coming years. COVID-related pressure on operating performance this year gave us the opportunity to initiate a position at a price that we view as attractive relative to our estimate of intrinsic value.2

Amazon is a pioneering technology company that has consistently parlayed first-mover advantages into an ever-broadening set of services for consumers and businesses. The company has leading market positions in e-commerce and cloud computing – both of which have visible long-run structural growth attributes, in our view. Amazon’s long history of innovation and internal reinvestment has allowed it to build significant competitive barriers in markets that require tremendous scale. We believe that the many advantages conferred by this unique position combined with sustainable future growth and demonstrable levers for profitability offer a compelling opportunity for Amazon to create substantial additional growth in shareholder value over a long time horizon.

Amazon has long been a company on our investment wish list, but in 2020 our investment thesis evolved in two significant ways as a result of the COVID-19 pandemic. First, recent earnings results confirmed that Amazon can achieve high levels of cash flow generation when operating at higher levels of capacity utilization across its vast infrastructure. Second, the pandemic has increased our confidence that Amazon’s present and prospective market share in both e-commerce and cloud computing is not only higher than previously estimated, but also will benefit from ‘front-loading’ effects related to the pandemic itself. The company’s second quarter results benefited from a large acceleration in e-commerce spending and cloud computing demand but did not show a one-for-one expansion in investment spending. This dynamic resulted in Amazon driving large incremental amounts of profitable business volumes across its asset base, creating an illustrative proof point about the future state of the business and its inherently attractive margin and return potential as growth investments eventually taper. Importantly, given the secular growth powering several of its businesses (and the underlying investments that will be required), we still assume that the true tipping point for scaled margin liftoff lies well in the future. Nevertheless, the dynamics at play in the second quarter helped to de-risk the potential range of profitability outcomes for the business at maturity, in our view.

In addition, we believe that the COVID-19 pandemic has accelerated e-commerce and cloud computing demand by several years, suggesting that key parts of Amazon’s business not only have been re-based higher, but are now more likely to grow at higher rates prospectively. We believe the company’s competitive position is therefore strengthening as the result of the pandemic, and its hold on the customer is increasing. As well, the continued struggles or outright failures of many traditional retailers may further bolster the online shift, to the benefit of Amazon as the largest e-commerce platform. For the cloud computing segment, the pandemic also has confirmed the value and appeal of the “app economy” and streaming services, both of which are major customer groups for Amazon Web Services. Noting the points above, we believe that 2020 has brought about a unique set of circumstances that have structurally improved Amazon’s growth profile and competitive position, giving us even greater confidence in the company’s ability to take market share and achieve strong compounding of financial value going forward.

Visa is a technology company that enables commercial transactions through its electronic payment networks. Visa’s credit and debit card networks connect tens of millions of merchants to billions of credit and debit card accounts, and the company’s infrastructure serves as the means to authorize and settle card transactions quickly, accurately, and with enhanced security and fraud protection. The payments industry benefits from the secular tailwind of market share shifting from cash to electronic payments, a trend that we believe is accelerating due to COVID-19. The accelerated pace of e-commerce growth and market share gains has a positive impact as well on the aggregate market share of electronic payments. An additional benefit of faster e-commerce growth is that Visa’s revenue yield and profit margins are higher for online transactions that require increased fraud prevention and other value-added services. The pandemic has also served to accelerate adoption of contactless payments for small transactions as consumers and merchants view them as a more hygienic way to settle in person purchases.

Visa and its primary competitor, Mastercard, operate as a de facto duopoly and have avoided competing on price and instead focus their brand investments and messaging on replacing cash and other forms of payments with card transactions. As such, the companies have been able to improve their respective financial profiles while penetrating the addressable market. As the market leader, Visa enjoys a significant scale advantage given its massive network that enables communication between merchants, banks and consumers. We view the barriers to building a payments network at scale are too great for a new entrant and therefore Visa and Mastercard can continue to compete rationally to grow the penetration of card payments at the expense of cash and check. Our view is that the durability of digital payment growth is underappreciated by the market and that Visa will enjoy years of growth from the tailwinds of growing global spending, increasing card market share, e-commerce, as well as corporate payments opportunities. Visa’s competitive advantages are reflected in strong returns on invested capital and free cash flow margins. COVID-19 is having a negative impact in the near term as Visa’s highly profitable cross border payments have been significantly impacted by travel restrictions. While this dynamic will pressure Visa’s free cash flow growth in 2020, our expectation is the long-term trajectory of free cash flow growth is in the double digits.

In addition to the new investments initiated during the third quarter, we added to our positions in Bureau Veritas, Fuchs Petrolub, Intercontinental Hotels Group, Heineken, and Diageo. We funded the purchases by modestly trimming Reckitt Benckiser, Alphabet, and Copart and exiting two positions in which we have relatively less conviction, Perrigo and Fairfax. We also exited our position in Lloyds Banking Group early in the third quarter following our re-assessment of the investment in the wake of very disappointing performance.

Our investment in Lloyds was underpinned by the bank’s leading position in several large retail banking businesses in the UK, a strong management team, funding and operating cost advantages, and a discount to our initial estimate of intrinsic value. Lloyds is the leading retail and commercial bank in the UK, operating a multi-brand, multi-channel banking model with both the largest branch network and the largest digital bank in the UK. Lloyds also has the lowest cost structure among its peers due to superior efficiency, economies of scale, and a simple UK-focused strategy. Many of these characteristics can be attributed to actions taken by Lloyds’ current management team, led by CEO Antonio Horta-Osorio, who joined the bank as CEO in 2011. Lloyds has the potential to generate double-digit returns on equity and distribute capital to shareholders, but the company’s return profile has been obscured in recent years due to persistent below-the-line misconduct and restructuring charges, as well as the COVID-19 pandemic during which the bank’s regulators have prevented capital distributions.

Our decision to exit Lloyds focused on three developments in the business since our initial investment. First, the banking environment has changed in the UK as a consequence of Brexit overhang and COVID-19, both of which dampened corporate investment and consumer spending, and caused a decline in short-term interest rates and flattening of the yield curve. This unfavorable banking environment, combined with its balance sheet hedging strategy, are likely to pressure Lloyds’ revenue for the foreseeable future. Separately, a regulatory change known as “ring-fencing” is likely to increase competition in the UK mortgage market, which is Lloyds’ largest business. While we expect Lloyds to continue to earn high returns in this line of business, the trajectory of returns is likely downward as competition increases. Third, and most recently, the company announced that CEO Antonio Horta-Osorio will step down in June 2021 and Chairman Norman Blackwell will step down as well. The combination of management change, heightened competition in its largest line of business, and an unfavorable banking environment in the UK prompted us to exit the position.

We ended the quarter with 33 portfolio companies and 44.3% of the portfolio concentrated in the top 10 positions, a cash position of 0.3%, and a weighted average price to intrinsic value of 93%.

On behalf our entire investment team, we thank you for being an investor with us in Global Equity. Please feel free to contact us with any questions or suggestions.

Sincerely, 

Regina Lombardi, CFA 
Portfolio Manager

Portfolio characteristics tables as of September 30, 2020. (Top 10 Countries, Sector Weighting, Top 10 Companies, Equity Weighting and Portfolio Characteristics)

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 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. Prices of emerging market securities can be significantly more volatile than the prices of securities in developed countries, and currency risk and political risks are accentuated in emerging markets.

Investing in medium sized companies typically exhibit greater risk and higher volatility than larger, more established companies.

For purpose of complying with the GIPS® standards, the firm is defined as Brown Brothers Harriman Investment Management ("IM"). IM is a division of Brown Brothers Harriman & Co. ("BBH"). IM claims compliance with the Global Investment Performance Standards (GIPS®). To receive a list of composite descriptions of IM and/or a presentation that complies with the GIPS standards, 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. Time Weighted Rate of Return is used to determine performance of a portfolio in a Composite. A portfolio's rate of return is the percentage change from the beginning balance to the ending balance of the period. Capital changes as well as dividends and other income earned during a period are included in the ending balance. Any reinvestment of dividends or other income will be reflected in the beginning balance of the following period. Sub-periods returns are linked to calculate a portfolio return for the period. Performance calculated in U.S. dollars.

The Composite includes all fully discretionary, fee-paying global equity accounts over $10 million that invest in a portfolio of approximately 30-40 companies primarily in developed markets, with a focus on companies with market capitalizations over $3 billion. Under normal conditions, at least 40% of investments will be in companies headquartered outside the United States. On 10/1/2020 the BBH Global Core Select Equity Composite was renamed the BBH Global Equity Composite. The strategy is benchmarked to the MSCI World Index (net of foreign withholding tax).

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. 2020. All rights reserved.

1Previously called the BBH Global Core Select Equity Strategy
2 BBH’s estimate of the present value of the cash that a business can generate and distribute to shareholders over its remaining life.