1Q Highlights
|
| Performance BBH U.S. Large Cap Equity Composite As of March 31, 2024 |
|||||||
|---|---|---|---|---|---|---|---|
Total Returns |
Average Annual Total Returns |
||||||
|
3 Mo. |
YTD |
1 Yr. |
3 Yr. |
5 Yr. |
10 Yr. |
Since Inception |
Gross of Fees |
9.06% |
9.06% |
28.28% |
10.52% |
12.91% |
10.31% |
10.71% |
Net of Fees |
8.79% |
8.79% |
27.04% |
9.43% |
11.80% |
9.23% |
9.62% |
S&P 500 |
10.56% |
10.56% |
29.88% |
11.49% |
15.05% |
12.96% |
10.34% |
Returns of less than one year are not annualized. |
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| Returns of less than one year are not annualized. 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 Strategy’s holdings. The index is not available for direct investment. Sources: BBH & Co. and S&P |
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Market Overview
During the 1st quarter of 2024, most companies in the Index reported 4th quarter and full year 2023 results and provided near- and long-term guidance. While financial performance improved throughout the year, 2023 was a fundamentally challenging year for the Index with net earnings and free cash flow (FCF)1 per share declining 1.4% and 3.1%, respectively. We would characterize forward guidance by the companies in the Index as unusually mixed, with pockets of fervent optimism related to artificial intelligence, the energy transition, and dominating investor sentiment, effectively drowning out concerns expressed in other parts of the economy.
Regardless of the rather subdued fundamental performance and outlook provided during the 1st quarter of 2024, the Index built on its incredibly robust stock price performance in 2023 to post a further gain of 10.56% over the first three months of the year. The strong stock price performance of the Index was primarily led by the Communication Services, Energy, and Information Technology sectors, which increased 15.82%, 13.69%, and 12.69%, respectively. The ascent continued to be disproportionately concentrated among a handful of mega-cap technology-related companies, with the so-called “Magnificent Seven”2 accounting for almost half of the Index’s first quarter return.
Portfolio Commentary
During the 1st quarter of 2024, most portfolio companies in the Strategy reported 4th quarter and full year 2023 results and provided near- and long-term guidance. The financial results of the portfolio companies in the Strategy were strong on an absolute basis with net earnings and FCF per share growing 15.7% and 21.8%, respectively. This compared very favorably to the fundamental performance of the Index, continuing a multi-year period of fundamental outperformance.3
| Free Cash Flow per Share Calendar Year Ending 2023 |
||||
|---|---|---|---|---|
|
1 Year/Year |
3 Year CAGR |
4 Year CAGR |
5 Year CAGR |
Strategy |
21.8% |
10.0% |
12.6% |
9.9% |
Index |
-3.1% |
5.2% |
5.7% |
5.1% |
| Net Earnings per Share Calendar Year Ending 2023 |
||||
|---|---|---|---|---|
|
1 Year/Year |
3 Year CAGR |
4 Year CAGR |
5 Year CAGR |
Strategy |
15.7% |
15.7% |
14.9% |
10.6% |
Index |
-1.4% |
16.7% |
8.0% |
6.7% |
The Strategy gained 9.06% (gross of fees) and 8.79% (net of fees) in the first quarter, with an absolute contribution of 700 basis points4 coming from the Information Technology, Industrials, and Financials sectors. While strong on an absolute basis, the stock price performance of the Strategy compared unfavorably to the 10.56% quarterly gain of the Index.
Stock prices reflect the confluence of many factors as well as the perspectives of myriad other investors, both active and passive, that do not share our perspectives on risk, fundamental economic value creation, or how to properly measure it. Regardless of these other views, over the long-term, we believe it is a reasonable and an economically sound premise that the price of stocks should follow their growth in FCF per share and that attractive valuations support economic upside and may mitigate risk. Consequently, that will remain our focus as we seek to deliver both strong absolute and relative after-tax returns over the long-term.
Portfolio Activity
During the quarter, we purchased one new company and made several portfolio rebalancing trades reflective of relative valuation opportunities, risk, and fit with our investment criteria.
The new company purchased during the quarter was Automatic Data Processing, Inc. (ADP). ADP is the leader in Human Capital Management (HCM) and Human Resources Outsourcing (HRO) software and services, delivering payroll for over 40 million workers globally across over 990,000 clients. In the U.S., ADP processes 30% of all W-2s and pays 17% of all workers (1 in 6) moving $2.7 trillion of U.S. payroll and taxes on behalf of its clients and their employees.
ADP has strong competitive advantages including high switching costs, low customer concentration, unmatched scale, high barrier to entry on state and local tax compliance, a strong brand, and high recurring revenues with customer retention rates of over 90% which bolster more resilient business fundamentals than perceived by the market. In addition to its leadership in an attractive and growing industry, ADP’s company specific initiatives to modernize and upgrade its technology products and solutions have the potential to further enhance its competitive position, long-term growth, and already attractive return on capital.
We believe current valuations for ADP’s stock to be attractive on both an absolute and relative basis. Given our belief that stock prices follow economic value creation over time and the currently constructive valuation of the company’s stock, we expect ADP to generate strong absolute and relative stock price returns over the long-term, while at the same time offering attractive dividend characteristics.
Outlook
We were pleased by the continued overall strong absolute and relative fundamental financial and operating performance of the portfolio companies in the Strategy. We were also pleased with the strong stock price performance of the Strategy during the quarter. Given the near- and long-term outlooks provided by the companies in the Strategy, we are optimistic that these strong trends will continue and are hopeful the differentiated financial attributes of the Strategy will be better recognized by other investors in the future, improving the stock price performance of the Strategy relative to the Index over time.
| Holdings Representative Account As of March 31, 2024 |
|
|---|---|
Berkshire Hathaway Inc (Class A) |
7.0% |
Alphabet Inc (Class C) |
6.4% |
Microsoft Corp |
5.9% |
Linde PLC |
5.6% |
Mastercard Inc |
5.5% |
KLA Corp |
5.2% |
Progressive Corp |
4.8% |
Oracle |
4.4% |
Waste Management Inc |
4.4% |
Arthur J Gallagher & Co |
3.9% |
Costco Wholesale Corp |
3.7% |
Alcon Inc |
3.6% |
Amazon.com Inc |
3.5% |
Booking Holdings Inc |
3.4% |
Thermo Fisher Scientific Inc |
3.4% |
Zoetis Inc |
3.0% |
Abbott Laboratories |
2.9% |
S&P Global Inc |
2.7% |
Texas Instruments Inc |
2.4% |
Copart Inc |
2.2% |
Nike Inc (Class B) |
2.2% |
Adobe Inc |
2.1% |
UnitedHealth Group In |
1.9% |
A.O. Smith |
1.9% |
Diageo PLC ADR |
1.5% |
Nestle SA ADR |
1.3% |
Automatic Data Processing |
1.3% |
Cash & Cash Equivalents |
4.0% |
Holdings are subject to change. |
|
| Representative Account Equity Weighting As of March 31, 2024 |
|
|---|---|
Common Stock |
96.0% |
Cash and Cash Equivalents |
4.0% |
Total |
100.0% |
| Representative Account Portfolio Characteristics As of March 31, 2024 |
|
|---|---|
Composite Assets (mil) |
$919.1 |
Number of Securities Held |
27 |
Average P/E |
28.0 |
Average Market Cap (bil) |
$482.7 |
Turnover (Rolling 12 Months) |
6.60% |
Exclude cash equivalents. |
|
| Representative Account Sector Weighting As of March 31, 2024 |
|
|---|---|
Communication Services |
6.7% |
Consumer Discretionary |
9.5% |
Consumer Staples |
6.7% |
Energy |
0.0% |
Financials |
24.8% |
Health Care |
15.5% |
Industrials |
10.1% |
Information Technology |
20.8% |
Materials |
5.8% |
Real Estate |
0.0% |
Utilities |
0.0% |
Total |
100.0% |
Reported as a percentage of portfolio securities, excluding Cash and Cash Equivalents. |
|
| Representative Account Top 10 Companies As of March 31, 2024 |
|
|---|---|
Berkshire Hathaway Inc |
7.0% |
Alphabet Inc |
6.4% |
Microsoft Corp |
5.9% |
Linde PLC |
5.6% |
Mastercard Inc |
5.5% |
KLA Corp |
5.2% |
Progressive Corp |
4.8% |
Oracle |
4.4% |
Waste Management Inc |
4.4% |
Arthur J Gallagher & Co |
3.9% |
Total |
52.2% |
Reported as a percentage of total portfolio. |
|
1 Free cash flow (FCF) is the cash a company generates after taking into consideration cash outflows that support its operations and maintain its capital assets.
2 The Magnificent Seven are a group of companies in the U.S. stock market: Alphabet Inc., Amazon.com Inc., Apple Inc., Meta Platforms Inc., Microsoft Corp., NVIDIA Corp., and Tesla Inc.
3 5 Year CAGR BBH analysis period starting 2018 through 2023, 5 Year Avg BBH analysis period starting 2019 through 2023. CAGR = compound annual growth rate; EBITDA = earnings before interest, taxes, depreciation, and amortization.
4 Basis points (bps) is a unit that is equal to 1/100th of 1% and is used to denote the change in a financial instrument.
Holdings are subject to change. Totals may not sum due to rounding.
Intrinsic value is an estimate of the present value of the cash that a business can generate and distribute to shareholders over its remaining life.
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.
Contribution figures are presented gross of fees and do not include cash and cash equivalents.
Basis points (bps) is a unit that is equal to 1/100th of 1% and is used to denote the change in a financial instrument.
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.
The Representative Account is managed with the same investment objectives and employs substantially the same investment philosophy and processes as the strategy.
Contribution to returns is of the Representative Account. The performance of the Representative Account is available upon request.
Brown Brothers Harriman Investment Management (“IM”), a division of Brown Brothers Harriman & Co (“BBH”), claims compliance with the Global Investment Performance Standards (GIPS®). 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 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. Returns include all dividends and interest, other income, realize and unrealized gain, are net of all brokerage commissions and execution costs. Results will vary amount client accounts. Performance calculated in U.S. dollars.
The Composite is fully discretionary, fee-paying accounts over $5 million that invest in a portfolio of approximately 25-35 companies with market capitalizations greater than $5 billion that are headquartered in North America, as well as in certain global firms located in other developed regions. This strategy is benchmarked to the S&P 500 Index.
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. 2024. All rights reserved.
Not FDIC Insured No Bank Guarantee May Lose Money
IM-14543-2024-04-23 Exp. Date 07/31/2024
