Highlights
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Market overview
In third quarter 2026, the equity markets demonstrated notable resilience in the face of structural headwinds, continued geopolitical concerns, and monetary policy tightening, with the S&P 500 Index up +2.3%. Year-over-year earnings growth for the S&P 500 stands at ~32% which, relative to a normalized rate over a longer-term horizon, suggests the market is overvalued by 15% to 20%. It is our belief that stock prices follow this trajectory of growth, and while earnings strength has driven recent broad-based stock price appreciation, this top-line headline has masked a heavily bifurcated market, with market breadth remaining poor and leadership concentrated in just a handful of sectors.
While AI-related disintermediation risks are real, the resulting stock price reaction to them is sometimes largely sentiment driven; the materiality of the declines is in part due to a changing market structure where nonfundamental investors are today’s price setters, controlling 65% to 75% of normal daily trading volume.
Against this backdrop, energy – which continues to benefit from regional conflicts and elevated oil prices – was the best performing sector, up +17.2%. Information technology was up +7.3% and continues to exhibit forward momentum in the face of AI-related capital expenditures; given its weight in the S&P 500, the sector contributed a significant amount to the index total return. Healthcare, commonly viewed as a defensive play, was up +6.5% and was likely viewed as a safety sector against broader macroeconomic risks.
The remaining seven sectors were in negative territory, with utilities and industrials – perceived to be the most impacted by rising long-term bond yields – the worst performing at -12.4% and -9.7% respectively.
Portfolio commentary
The financial results of our portfolio companies were strong, with our recipe for economic value creation – reported returns on invested capital plus implied free cash flow per share growth – attractive on both an absolute and relative basis. Compared to the extreme uncertainty that accompanies the price other market participants are willing to pay for our portfolio companies and those we choose not to own, we feel more in control of the fundamental performance and superior valuation of our portfolio companies.
To that end, our portfolio companies have executed well and have produced solid growth and fundamental economic performance while maintaining appropriately conservative capital structures. These achievements are evident at the aggregate portfolio level, where we have observed attractive growth in revenue, cash flow, and earnings; superior profit margins; returns on capital; and healthy balance sheets. In our view, momentum and high beta continue to drive market performance at the expense of growth, quality, and positive fundamental factors. After making opportunistic adjustments, we remain focused on finding new investments and rebalancing existing portfolio companies in the context of a market environment we view as challenged. For the quarter, the Strategy’s two largest detractors to total return were KLA Corp. (KLAC) and Applied Materials (AMAT) respectively.
KLA (share price -35.3%) was the largest performance detractor, reducing the Strategy’s total return by ~236 basis points (bps)1 during the quarter. Shares declined amid growing concerns that export restrictions and escalating geopolitical tensions could dampen demand from China, a critical market for semiconductor equipment spending. Investor sentiment was further pressured by fears that accelerating AI-related investment may pull forward demand, raising questions about the durability of the current wafer fabrication equipment cycle. While these concerns weighed on valuation, the pressure appears more cyclical and policy-driven than structural, as KLA remains a mission-critical supplier of process control and yield management solutions that are essential to increasing semiconductor complexity across both AI and non-AI end markets.
Applied Materials (share price -29.2%) detracted ~139 bps from the Strategy’s total return during the quarter. Shares declined as investors reassessed the outlook for semiconductor capital spending following heightened trade restrictions, uncertainty around China-related revenue exposure, and concerns that customers may moderate investment after an extended period of robust AI infrastructure spending. The weakness reflected broader apprehension surrounding the pace and sustainability of wafer fabrication equipment demand rather than any company-specific execution issues. While near-term visibility remains subject to geopolitical and cyclical fluctuations, the pressure appears temporary rather than structural, as Applied Materials continues to benefit from long-term semiconductor content growth and increasingly complex manufacturing processes that require greater process intensity across leading-edge and mature-node technologies.
These two positions had a large combined average active weight of almost 6% over the quarter-to-date period, and this had a disproportionate negative impact to the Strategy’s total return. We do not see this selloff as idiosyncratic, as fundamentals remain compelling. Rather, we consider overall softness in the semi-cap space related to AI pacing concerns and general calls for guardrails to be implemented as headwinds. Furthermore, stretched valuations and continued elevated expectations led to profit taking.
For the quarter, the Strategy’s two largest contributors to total return were Microsoft (MSFT) and Apple (AAPL) respectively.
Microsoft (share price +37.8%) was the largest contributor during the quarter, adding ~222 bps to the Strategy’s total return. Share price performance reflected continued strength in Azure cloud growth, which benefited from robust demand for AI workloads and accelerating adoption of the company’s generative AI offerings. Investors responded favorably to evidence that Microsoft’s substantial investments in AI infrastructure were translating into increased revenue growth and customer demand across both cloud and productivity platforms. With its unique position spanning cloud infrastructure, enterprise software, and AI applications, Microsoft remains well positioned to benefit from the growing adoption of AI across the global economy.
Apple (share price +15.2%) contributed ~93 bps to the Strategy’s total return. Share price performance during the period reflected resilient demand across the company’s installed base, growing investor confidence in Apple’s AI strategy, and the successful launch of its latest iPhone lineup. The stock also benefited from the continued expansion of the higher-margin services segment, which provides recurring revenue streams and strengthens customer engagement within the ecosystem. With more than 2 billion active devices worldwide and a highly loyal customer base, Apple remains well positioned to benefit from long-term growth in premium consumer technology, digital services, and ecosystem-driven spending.
Today’s market environment warrants caution in our view, and our portfolio construction process has evolved given changing market dynamics. In an environment that remains highly selective, the Strategy’s underperformance was exacerbated by our underweight to software. We didn’t fully participate in the valuation reversal and rotation into the space, where market leaders are showing signs of being able to integrate and monetize AI. We are hyper-focused on managing the risk around AI exposure and are continuing to diversify while maintaining a level of commitment with some of our long-standing investment disciplines.
Portfolio activity
During our evaluation of market risk, we took portfolio action intended to reduce AI-centric product and business model disruption and disintermediation risk. We view risk as the likelihood of permanent loss of capital, not volatility or the fear of missing out on returns generated by less-constrained strategies or reference benchmarks, and our trading activity during the quarter balanced these risks with the significant fundamental and valuation support the stocks we own offer.
During the quarter, we executed several portfolio rebalancing trades reflective of relative valuation opportunities, risk, and fit with our investment criteria.
Trim: We trimmed Analog Devices, Mastercard, BlackRock, and Linde.
Add: We redeployed proceeds and available cash by adding to our positions in Meta, Rockwell Automation, Parker Hannifin, Medtronic, Alphabet, and ServiceNow.
Initiate: After making these adjustments, we capitalized on relative valuation by initiating a position in Spotify, a high-quality company that builds upon our objective of having a portfolio founded on durable fundamentals that can endure times of market stress (brief investment thesis summary can be found at the end of this quarterly update). We also initiated positions in Texas Instruments and Visa, both of which were previously held in the Strategy but had been sold to remain within the maximum holdings’ threshold, which has since been increased.
Turnover during the quarter and the year-to-date period was 7.0% and 33.9% respectively.
Holdings (As of September 30, 2026) | |||
|---|---|---|---|
| Holding | Sector | Weight (%) | |
| Microsoft Corp | Information technology | 7.67% | |
| Alphabet Inc | Communication services | 7.08% | |
| NVIDIA Corp | Information technology | 7.05% | |
| Apple Inc | Information technology | 7.04% | |
| Amazon.com Inc | Consumer discretionary | 4.63% | |
| KLA Corp | Information technology | 4.01% | |
| Applied Materials Inc | Information technology | 2.96% | |
| Cadence Design Systems Inc | Information technology | 2.83% | |
| Eli Lilly & Co | Health care | 2.76% | |
| Palo Alto Networks Inc | Information technology | 2.75% | |
| Berkshire Hathaway Inc | Financials | 2.72% | |
| Rockwell Automation Inc | Industrials | 2.58% | |
| Waste Management Inc | Industrials | 2.55% | |
| Progressive Corp | Financials | 2.33% | |
| Parker-Hannifin Corp | Industrials | 2.22% | |
| Johnson & Johnson | Health care | 2.20% | |
| Analog Devices Inc | Information technology | 2.01% | |
| Texas Instruments Inc | Information technology | 1.97% | |
| Visa Inc | Financials | 1.91% | |
| Walmart Inc | Consumer staples | 1.80% | |
| Oracle Corp | Information technology | 1.80% | |
| Mastercard Inc | Financials | 1.78% | |
| Meta Platforms Inc | Communication services | 1.77% | |
| Broadcom Inc | Information technology | 1.71% | |
| Linde PLC | Materials | 1.70% | |
| Costco Wholesale Corp | Consumer staples | 1.56% | |
| JPMorgan Chase & Co | Financials | 1.47% | |
| S&P Global Inc | Financials | 1.43% | |
| Hilton Worldwide Holdings Inc | Consumer discretionary | 1.21% | |
| Coca-Cola Co | Consumer staples | 1.04% | |
| Arthur J Gallagher & Co | Financials | 0.98% | |
| Thermo Fisher Scientific Inc | Health care | 0.94% | |
| Zoetis Inc | Health care | 0.90% | |
| Procter & Gamble Co | Consumer staples | 0.90% | |
| ServiceNow Inc | Information technology | 0.80% | |
| McDonald's Corp | Consumer discretionary | 0.78% | |
| Blackrock Inc | Financials | 0.78% | |
| Medtronic PLC | Health care | 0.74% | |
| Intuitive Surgical Inc | Health care | 0.74% | |
| Home Depot Inc | Consumer discretionary | 0.72% | |
| NIKE Inc | Consumer discretionary | 0.71% | |
| Graco Inc | Industrials | 0.69% | |
| Abbott Laboratories | Health care | 0.69% | |
| Booking Holdings Inc | Consumer discretionary | 0.65% | |
| Ecolab Inc | Materials | 0.65% | |
| Alcon AG | Health care | 0.47% | |
| Compass Group PLC | Consumer discretionary | 0.46% | |
| Spotify Technology SA | Communication services | 0.44% | |
| Otis Worldwide Corp | Industrials | 0.39% | |
| Cash and cash equivalents | 0.04% | ||
Holdings are subject to change. | |||
Outlook
At the end of third quarter 2026, we held positions in 49 companies, with the 10 largest holdings accounting for 49% of total assets. We ended the quarter with a cash position of 0.04%.
In our view, momentum and high beta continue to drive market performance at the expense of growth, quality, and positive fundamental factors. After making opportunistic adjustments, we remain focused on finding new investments and rebalancing existing portfolio companies in the context of a market environment we view as challenged. With a backdrop of interest rate headwinds, geopolitical risk, and still-high market expectations, we remain focused on investing in companies that meet our criteria, have the fundamental characteristics in place that allow for durability in times of economic and market stress, and offer valuation support.
Our goals are multifaceted and include generating strong absolute and relative returns while at the same time ensuring we have a portfolio built on durable fundamentals that can endure times of market stress. In order to achieve all these objectives, we have found it imperative to diversify the portfolio – not with the intent to manage tracking error, but in order to distribute active share and manage risk that will allow us to both minimize downside capture and participate in the upside. To conclude, our portfolio companies have executed well and produced solid growth and fundamental economic performance while maintaining appropriately conservative capital structures. Given the near- and longer-term outlooks provided by the companies, we are optimistic that these strong trends will continue
Thank you for your interest in the BBH U.S. Large Cap Equity Core Select Institutional Strategy. Please reach out if you have any questions.
BBH Large Cap Equity Team
Hayley Xuereb, Chris Stonerook, Anurag Dhanwantri, Eric Yeh, Mark Weber, Rohit Mitter, Antonio Verrico, and Scott Hill
Initiated positions
Spotify is the global leader in audio streaming, operating within a large and underpenetrated market that continues to benefit from the secular transition from traditional media consumption to digital subscription-based audio services. The company’s scale advantage is reflected in its industry-leading subscriber base, global reach, and position as the primary platform connecting listeners, creators, artists, and rights holders across the audio ecosystem. Spotify has leveraged this scale to build a powerful recommendation engine, highly personalized user experience, and social features that increase engagement, strengthen customer retention, and lower customer acquisition costs through organic adoption. The company’s most important competitive advantage is its role as the leading discovery and distribution platform for music and audio content, creating a self-reinforcing network in which greater listener scale attracts creators, improves content breadth, enhances recommendation quality, and further increases user engagement. Spotify also benefits from growing bargaining power across the music ecosystem due to its strategic importance to artists and labels, supporting the expansion of higher-margin businesses including advertising, creator tools, promotional marketplace services, podcasts, and audiobooks. These advantages contribute to attractive business economics characterized by recurring subscription revenue, demonstrated pricing power, favorable working capital dynamics, limited capital intensity, and strong free-cash-flow conversion. We expect continued subscriber growth, increasing monetization of the platform, and a favorable mix shift toward high-margin revenue streams to drive sustained economic profit growth over time. Given Spotify’s durable competitive advantages, expanding profitability, strong cash generation potential, and attractive current valuation, we believe the company is well positioned to compound economic value and generate attractive long-term shareholder returns.
Texas Instruments (TI) is one of the world’s largest analog semiconductor companies, designing and manufacturing chips that perform essential power management, signal processing, and embedded functions across a broad range of industrial, automotive, and electronics applications. Its competitive advantage is rooted in the breadth and longevity of its product portfolio, customer switching costs, and increasingly differentiated manufacturing and distribution models. TI sells more than 80,000 products to over 100,000 customers at an average selling price of roughly $0.45, making its chips a small portion of customers’ overall product costs while often serving critical functions. Once designed into a product, the cost and risk of redesigning and requalifying around a competing component frequently outweigh the potential savings, supporting product lives that can exceed a decade and creating an unusually recurring revenue base for a semiconductor company. TI has reinforced these demand-side advantages by shifting approximately 80% of revenue to direct sales, strengthening customer relationships, improving demand visibility, and retaining economics previously captured by distributors. On the supply side, TI benefits from the specialized expertise required to design analog chips and from manufacturing on trailing-edge process nodes, where scale and manufacturing efficiency matter more than continual node migration. Its current investment cycle should further strengthen this advantage by moving more than 90% of production in-house and over 70% of wafers to lower-cost 300mm manufacturing, structurally improving gross margins while increasing supply-chain control. These advantages have historically allowed TI to gain share, generate strong returns on capital, and produce significant free cash flow. As elevated capital spending normalizes, we expect free cash flow and economic profit to improve meaningfully, supporting attractive long-term economic value creation. Combined with a strong fit with our investment criteria and an attractive valuation within our range of estimated intrinsic values, we believe TI is well positioned to generate compelling absolute and relative returns over the long term.
Visa is a global payments technology company that operates one of the world’s largest electronic payment networks, connecting consumers, merchants, financial institutions, businesses, and governments to facilitate digital payments and money movement. Visa’s competitive advantage is the scale, ubiquity, and trust embedded in this network, which has allowed the company to participate in the secular migration from cash and checks toward electronic payments while continually expanding the ways it monetizes its infrastructure. VisaNet remains the foundation of its Consumer Payments franchise, but Visa has steadily broadened its addressable market through Visa Direct, value-added services, and its “network of networks” strategy, connecting cards with bank accounts, real-time payment systems, and other payment rails. This evolution strengthens Visa’s position as the secure, reliable foundational layer of the payments ecosystem while allowing financial institutions and fintech companies to concentrate on the consumer-facing experience. The resulting economics are exceptional: Visa’s asset-light model, network effects, and enormous transaction scale have historically supported high margins, attractive returns on capital, strong economic profit growth, and substantial free cash flow generation. We expect continued growth in electronic payments, new payment flows, and value-added services to enable Visa to compound economic value at attractive absolute rates and ahead of the relevant benchmarks over time. Importantly, Visa has repeatedly demonstrated an ability to adapt to technological disruption, navigating mobile payments, digital wallets, account-to-account payments, buy-now-pay-later, blockchain, and other innovations, while often turning potential disruptors into partners. AI and stablecoins represent the next evolution of that challenge, but Visa’s history of adapting its network while preserving its role in the ecosystem gives us confidence in the durability of its competitive position. Combined with an attractive valuation across our range of estimated intrinsic values, Visa’s competitive dynamics, exceptional free cash flow profile, and long runway for growth support attractive absolute and relative long-term return potential.
Performance | |||||||
|---|---|---|---|---|---|---|---|
| Total returns | Average annual total returns | ||||||
| Composite/benchmark | 3 mo. | YTD | 1 yr. | 3 yr. | 5 yr. | 10 yr. | Since inception |
| BBH U.S. Large Cap Equity - Core Select Institutional Composite (gross of fees) | 0.19% | 7.60% | 9.05% | N/A | N/A | N/A | 12.42% |
| BBH U.S. Large Cap Equity - Core Select Institutional Composite (net of fees) | -0.06% | 6.81% | 7.97% | N/A | N/A | N/A | 11.32% |
| S&P 500 Total Return Index | 2.30% | 12.75% | 15.74% | 22.89% | 13.79% | 15.33% | 17.70% |
Inception date: 04/01/2024. Creation date: 10/01/2005. Returns of less than one year are not annualized. Past performance does not guarantee future results. 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 Fund’s holdings. The index is not available for direct investment. Sources: BBH & Co. and S&P | |||||||
Conatct us
1 One basis point is equal to 1/100th of 1%, or 0.01%.
RISKS
Formerly called U.S. Large Capital Equity Strategy.
RISKS Investors should be able to withstand short-term fluctuations in the equity markets and fixed income 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.
The Strategy and may assume large positions in a small number of issuers which can increase the potential for greater price fluctuation.
International investing involves special risks including currency risk, increased volatility, political risks, and differences in auditing and other financial standards.
Gross of fee performance does not reflect the deduction of investment advisory fees. Net of fees performance results reflect the deduction of the maximum investment advisory fees. Returns include all dividends and interest, other income, realized and unrealized gain, are net of all brokerage commissions and execution costs. Performance calculated in U.S. dollars.
Portfolio Characteristics are of the Representative Account. The Representative Account is managed with the same investment objectives and employs substantially the same investment philosophy and processes as the strategy.
Contribution and other performance related information are presented gross of fees. See the performance table for the effect of investment advisory fees on returns.
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.
The objective of our US Large Cap Equity Strategy – Core Select Institutional is to provide investors with long-term growth of capital and generate attractive returns over full economic cycles. The Composite includes all fully discretionary accounts that invest in a portfolio of approximately 25-35 companies. This concentrated and unconstrained strategy aims to achieve strong after-tax absolute and relative returns, with capital appreciation as a focus, while fundamentally outperforming in periods of economic or market stress. The Composite is benchmarked to the S&P 500 Index. There can be no assurance the Strategy will achieve its investment objectives.
The Institutional Investment Management business within Brown Brothers Harriman’s Capital Partners line of business claims compliance with the Global Investment Performance Standards (GIPS). It includes Brown Brothers Harriman Credit Partners, LLC. (BBH Credit Partners). 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 John Ackler at 212-493-8247 or via email at john.ackler@bbh.com.
Brown Brothers Harriman & Co. (“BBH”) may be used 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. 2026 All rights reserved.
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IM-19417-2026-10-29 Exp. Date 01/31/2027
