Each year, Brown Brothers Harriman’s (BBH’s) Private Banking business hosts Investor Day – an event designed to bring together BBH clients, friends of the firm and our investment teams in discussion about the current market environment and both our internal and external managers’ investment philosophies. The 2016 Investor Day was held in late September at The Plaza in New York City and featured a variety of speakers in both panel and interview formats. Participation was interactive with our investment managers in attendance, including AltaRock Partners, Barings, Burgundy Asset Management, Clarkston Capital Partners, Hitchwood Capital Management, Oaktree Capital, Sandton Capital and Select Equity Group, as well as members of BBH’s investment teams. Quality, in-depth questions were addressed during formal presentations and informal conversations.
Jeff Meskin, a BBH Partner and the head of Private Banking, kicked off the day with a brief business update, including a mention of our recently launched branding campaign and acknowledgment of the firm’s new Managing Partner, Bill Tyree. To set the foundation for the remainder of the day, Meskin shifted his attention to the current market climate and BBH’s approach to investing, leading directly into a brief panel discussion focused on the firm’s investment philosophy and capital allocation strategy with Chief Investment Strategist Scott Clemons and Brian Nelson, the head of our Investment Research Group.
As the firm’s “chief worrier,” Clemons described our investment approach as “worrying top-down and investing bottom-up.” BBH’s Investment Research Group remains mindful of top-down factors such as macroeconomic, political, currency and regulatory changes. However, client portfolios are constructed on a bottom-up basis, meaning that the characteristics and current opportunity set of each individual underlying investment manager drives allocation decisions. Meskin commented that instead of trying to time markets, “we attempt to find managers that can compound capital over long periods of time” with repeatable investment processes. He went further, stating: “A CIO of an endowment office we respect recently described his firm’s approach as ‘finding and allocating capital to 20 Warren Buffetts early in their careers dispersed across the globe, getting out of their way and letting them compound.’ That is essentially what we are trying to do, too. While it is easier said than done, we seek to combine high-conviction portfolios with prudent geographic and asset type diversification.” BBH looks to allocate to these managers over time in markets where attractive asymmetric risk-adjusted returns can be achieved.1
The next feature of the day was a panel of U.S.-focused equity investors, moderated by Will Brennan, a member of our Investment Research Group and the co-portfolio manager of BBH’s 1818 Partners strategy. Panelists Mark Massey, a principal and portfolio manager at AltaRock Partners; Jeff Hakala, a partner and chief investment officer at Clarkston Capital Partners; and Michael Keller, a BBH Partner and the co-portfolio manager of our Core Select investment strategy, shared with the audience their respective firm’s investment philosophy and approach. Not surprisingly, all three investors shared similar investment criteria, though each portfolio looks slightly different. For example, when selecting smaller market capitalization stocks for Clarkston’s small/mid-cap equity strategy, Hakala seeks businesses that are simple, have high returns on capital, possess competitive advantages that are unlikely to be disrupted, are run by good stewards of capital and operate in “micro-niche” oligopolistic industry structures that are not large enough nor growing fast enough to attract large competitors. As Hakala says: “We look for those where it is easier to be right.”2 The audience heard similar stories from Massey and Keller, who each focus on the larger market capitalization portion of the U.S. market.
Toward the end of the panel, Brennan asked Keller to discuss the current market environment in which value-oriented investors have found it challenging to invest given elevated valuation levels across most equity markets and sectors. Keller shared that high valuations have certainly presented challenges for BBH’s Core Select team, which focuses on identifying opportunities to purchase shares of a company with a margin of safety,3 or buffer between price and intrinsic value.4 For a strategy that prioritizes business quality above all else, it has been difficult to find these opportunities given that prices and valuations of higher-quality companies and sectors, such as consumer staples, are elevated in the eighth year of a bull market. Keller ended on a high note, though, commenting, “The good thing is, you don’t have to just stay along for the ride. We manage the portfolio to first create, and then maintain, a margin of safety – not just in each investment, but at the portfolio level overall.” As active managers, Keller, Massey and Hakala are able to steer in and out of investment opportunities depending on margins of safety.
A one-on-one interview with James Crichton followed, hosted by Carson Christus, another member of the firm’s Investment Research Group. Crichton is the founder of Hitchwood Capital Management, which manages a global long/short equity strategy. After providing an introduction to his firm and his team’s investment approach and portfolio construction process, Crichton discussed how he is approaching the current market environment. Most interestingly, Crichton shared some of his thoughts related to the ever-evolving investment landscape, particularly for long/short managers. He began by admitting that there is much more crowding into specific themes, ideas, sectors and individual positions particularly among hedge funds and that “with crowding comes the risk of ‘point volatility’ – the idea that when a lot of long/short managers own a security, there will be a lot more uncertainty around events or quarters.” Crichton added, “From my perspective, when you are taking a one-, two- or three-year view of a business, you have to be prepared to underwrite that volatility.” When it comes to his team’s investment process, he also acknowledged that as a result of technological improvements over the past several decades, there is now much more data available to analyze and that dovetailing this work into Hitchwood’s bottom-up, fundamentally focused investment approach is one way in which he has improved and enhanced this process over time.
The next panel focused on non-U.S. markets. Anne-Mette de Place Filippini, a portfolio manager at Burgundy Asset Management; Chad Clark, a portfolio manager at Select Equity Group; and Tim Hartch, a BBH Partner and the co-portfolio manager of our Global Core Select strategy, participated in a discussion hosted by Caroline Thomas, also of the Investment Research Group. The panel’s structure mirrored that of the U.S. equity panel; however, some of the themes or challenges facing these investors differed given their focus on international markets, both developing and developed. As the portfolio manager of an emerging markets strategy, de Place Filippini discussed her intense focus on ownership structures and company management, as these structures and dynamics can be very different in emerging markets from their more developed counterparts. When asked about the role of cash in his strategy, Clark explained that because Select Equity Group is not willing to compromise on margin of safety to either buy a new position or hold an existing one, the firm is comfortable holding excess cash until more attractive opportunities present themselves. Speaking at a time when his strategy held a significant amount of cash, Clark was optimistic that he would again have the opportunity to capitalize on attractive investment opportunities in the future as market conditions evolve and views cash as having option value in today’s environment. Hartch followed by noting that “the amazing thing about individual securities is they are very volatile, so if you are patient, you get an opportunity.”
The feature of the event was a fireside chat with Will Thorndike, author of The Outsiders, and Rick Witmer, a BBH Partner, long-time investor and member of several equity investment teams at the firm throughout his career. During the discussion, Witmer spoke with Thorndike about his book, which explores eight unconventional CEOs that excelled at allocating capital, as well as his investing career in the public and private domains. When asked to summarize the key themes of The Outsiders, Thorndike responded:
"The best analogy for the book is duplicate bridge. Duplicate bridge is an advanced form of bridge in which a group of teams of two show up in a room. They are then divided into tables of four, each of which is then dealt the exact same cards in the exact same sequence – minimizing the role of luck. At the end of the evening, the team with the most points wins. So, it is designed to be a pretty pure test of skill. … I would contend that over long periods of time within an industry, it is duplicate bridge. If one company massively outperforms its peer group, it is worthy of study."
In discussing the themes that spanned across each of the CEOs profiled, Thorndike explained that “there are two things that CEOs need to do to be successful over the long term. They need to optimize profits of the business they are running, and they then need to invest those profits – deploy the capital created by those profits.”5
To round out the day, BBH Partner Meskin hosted a panel featuring three private credit investors – Jenny Box, a managing director at Oaktree Capital; Eric Lloyd, the head of global private finance at Barings; and Rael Nurick, a managing partner at Sandton Capital. The panelists discussed the current fixed income investing environment and how their strategies attempt to generate attractive risk-adjusted returns in different parts of a company’s capital structure. Lloyd described his strategy at Barings as being focused around “not losing money and picking up an attractive illiquidity premium that provides an attractive current yield to investors – frankly, the more ordinary, the better for us.” He added, “What we really do is provide senior secured first lien loans … in the institutional market.” In contrast, Nurick and Box focus on distressed credit opportunities both domestically and abroad. Sandton seeks illiquid distressed business loans, which the firm buys directly from commercial banks or workout desks, while Oaktree’s distressed group purchases distressed debt across a wide variety of industries and geographies.
Overall, the event was a success, and BBH looks forward to hosting our next Investor Day in fall 2017. Should you have any questions about the event, please do not hesitate to reach out to your BBH relationship manager.
This publication is provided by Brown Brothers Harriman & Co. and its subsidiaries ("BBH") to recipients, who are classified as Professional Clients or Eligible Counterparties if in the European Economic Area ("EEA"), solely for informational purposes. This does not constitute legal, tax or investment advice and is not intended as an offer to sell or a solicitation to buy securities 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 for promotion, marketing or recommendation to third parties. This information has been obtained from sources believed to be reliable that are available upon request. This material does not comprise an offer of services. Any opinions expressed are subject to change without notice. Unauthorized use or distribution without the prior written permission of BBH is prohibited. This publication is approved for distribution in member states of the EEA by Brown Brothers Harriman Investor Services Limited, authorized and regulated by the Financial Conduct Authority (FCA). BBH is a service mark of Brown Brothers Harriman & Co., registered in the United States and other countries.
© Brown Brothers Harriman & Co. 2017. All rights reserved. 2017.
1 For more information on BBH’s differentiated approach to building investment portfolios, read our fourth quarter 2016 InvestorView article, “BBH’s Approach to Portfolio Construction.”
2 For more information on Clarkston Capital Partners’ investment approach, read our second quarter 2016 InvestorView article, “Manager Spotlight: Interview with Jeff Hakala from Clarkston Capital Partners.”
3 Margin of safety: when a security meets our investment criteria and is trading at meaningful discount between its market price and our estimate of its intrinsic value.
4 Intrinsic value: BBH’s estimate of the present value of the cash that a business can generate and distribute to shareholders over its remaining life.
5 For more insights on The Outsiders, read our fourth quarter 2015 InvestorView article, “Book Review: The Outsiders: Eight Unconventional CEOs and Their Radically Rational Blueprint for Success.”