In October 2020, BBH US Large Cap Equity Composite1 (“US Large Cap Equity” or “the Strategy”) declined by -1.96%, which compared to a loss of -2.66% for the S&P 500 Index. Our top performer in the month was Alphabet and our largest detractor was Mastercard. We initiated a position in Starbucks, the world’s largest specialty coffee retailer.
Alphabet, the parent holding company of Google, reported solid Q3 2020 results during the month. Alphabet’s advertising businesses showed broad strength across its markets, indicating a faster-than-anticipated recovery from the COVID-19 economic crisis. Improved operating profitability was aided by management’s careful expense control, but key investments in high-growth areas such as cloud computing were sustained. The company briefly addressed a recently filed Department of Justice lawsuit that claims Alphabet has pursued anti-competitive practices in online search. Google is expected to file an initial response to the complaint in the coming weeks, after which point a multi-year legal process could commence, in our view. While there is likely to be volatility as headlines arise from this case, at this point we do not foresee material changes to Alphabet’s business model or long-term prospects.
Mastercard reported results near the end of the month that were impacted by lower cross-border transactions due to pandemic-related restrictions on travel. Cross-border revenues are among Mastercard’s highest yielding and most profitable transactions because of increased security and fraud services that are typically required. While Mastercard’s underlying business has strengthened during the pandemic given increased demand for electronic payments for small-dollar-value transactions and fast growth in contactless payments, the company’s total revenues will continue to be depressed until cross-border travel begins to normalize.
Starbucks Corp. is the world’s largest roaster and retailer of specialty coffee. We believe the company is well positioned to continue strengthening its leadership in an attractive industry driven by robust unit economics, focus on customer engagement, and the ability to adapt as consumer preferences and purchase behavior evolve. Starbucks recently announced actions to make its leading rewards program more accessible to a broader base of customers. The company is also accelerating its store format evolution to better serve customers seeking convenience with more drive-through, curbside, and pick-up only locations. The long-term implications of these proactive strategic steps have the potential to further increase loyalty and throughput driving value creation for a long period of time.