| Holdings Representative Account As of September 30, 2023 |
|
|---|---|
Berkshire Hathaway Inc (Class A) |
6.7% |
Alphabet Inc (Class C) |
6.4% |
Mastercard Inc |
5.2% |
Linde PLC |
5.1% |
Microsoft Corp |
5.1% |
Arthur J Gallagher & Co |
4.6% |
Progressive Corp |
4.4% |
Oracle Corp |
4.0% |
KLA Corp |
3.9% |
Alcon Inc |
3.9% |
Costco Wholesale Corp |
3.7% |
Waste Management Inc |
3.6% |
Zoetis Inc |
3.6% |
Thermo Fisher Scientific Inc |
3.4% |
Booking Holdings Inc |
3.4% |
Abbott Laboratories |
2.8% |
Amazon.com Inc |
2.7% |
S&P Global Inc |
2.7% |
Copart Inc |
2.6% |
NIKE Inc (Class B) |
2.5% |
Texas Instruments Inc |
2.5% |
Adobe Inc |
2.5% |
Graco Inc |
2.4% |
A. O. Smith Corp |
2.4% |
Diageo PLC ADR |
1.8% |
Nestle SA ADR |
1.6% |
Cash & Cash Equivalents |
6.4% |
Holdings are subject to change. |
|
3Q Highlights
|
Market Overview
The S&P 500 declined -3.27% in the third quarter, following three consecutive quarterly gains. Risk was repriced during the period as interest rates reached their highest levels in 16 years and investors began to adjust to the idea that rates are likely to remain higher for longer than initially anticipated. On a year-to-date basis the benchmark S&P 500 is up 13.07% and 21.62% over the trailing 12-months. While market breadth improved in the third quarter, it has been a historically narrow market on a year-to-date basis with just a few stocks generating the majority of the S&P 500’s returns; on an equal-weighted basis, the benchmark is essentially flat for the year. Energy and Communication Services were the best performing sectors for the third quarter, while Information Technology was a notable laggard in contrast to the first half of the year.
| Performance BBH U.S. Large Cap Equity Composite As of September 30, 2023 |
|||||||
|---|---|---|---|---|---|---|---|
Total Returns |
Average Annual Total Returns |
||||||
|
3 Mo. |
YTD |
1 Yr. |
3 Yr. |
5 Yr. |
10 Yr. |
Since Inception |
Gross of Fees |
-2.37% |
12.49% |
22.92% |
8.60% |
8.83% |
9.27% |
9.87% |
Net of Fees |
-2.62% |
11.66% |
21.72% |
7.53% |
7.75% |
8.19% |
8.79% |
S&P 500 |
-3.27% |
13.07% |
21.62% |
10.15% |
9.92% |
11.91% |
9.35% |
Returns of less than one year are not annualized. |
|||||||
| 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 |
|||||||
Portfolio Commentary
The BBH U.S. Large Cap Equity Strategy (“the Strategy”) declined -2.37% for the third quarter, modestly outperforming the benchmark S&P 500’s loss of -3.27%. At the sector level, Communication Services and Financials were positive contributors, while Industrials and Information Technology were the primary detractors. Overall, security selection was positive, particularly in Financials, and allocation was neutral. At the security level, top contributors included Alphabet (GOOG), Booking Holdings (BKNG), and Progressive (PGR). Top detractors were Waste Management (WM), Oracle (ORCL), and Graco (GGG). At quarter end, the portfolio held 26 positions, 49% in the top 10, 6% in cash, and traded at 87% of our estimate of intrinsic value.1 Over the course of the quarter, we exited Celanese (CE) and Dollar General (DG). There were no new positions initiated.
We exited our position in Celanese for two reasons, both of which we believe increase the range of potential outcomes to the downside, particularly given the Company’s high degree of financial leverage. The first reason was weakening chemical commodity and intermediate chemical demand in China, a key global and company-specific end-market and producing region. The second was the risks associated with a lengthy United Auto Workers strike and its impact on the North American automotive market, another key end market and recent area of strength for Celanese. While these risks are not unique to the Company, they are exacerbated by the Company’s high degree of financial leverage assumed to finance the 2022 DuPont Mobility & Materials acquisition. Given these concerns, we believed it would be prudent to step aside following a near-term improvement in valuation.
We also exited our investment in Dollar General to reallocate capital to higher quality investments with greater visibility in the current environment. The rapid pace of growth through the pandemic led to recent execution challenges at Dollar General. These issues were exacerbated by supply chain and labor headwinds, and a weaker outlook for the Company’s core lower income consumer. While management is investing in the business to address execution issues, the pressure on its core customer creates greater uncertainty while heightened theft and crime are a more recent and noteworthy broad headwind for retail. Together, this sets up a challenging near-term backdrop for retail businesses to operate. Historically, concerns related to the consumer, competition, or the business model have proven to be temporary or addressable by the Company, resulting in attractive investment opportunities for patient investors. At the same time, the current environment is unique, and visibility remains low on the adequacy of investments and timing of a turn in Dollar General’s results as its core consumer is facing a disproportionate level of pressure. Given these developments, we decided to redeploy capital in higher conviction opportunities.
Outlook
“Unique, muddy, and unusual” are adjectives used with increasing frequency to describe the post-pandemic business cycle. There is no doubt the extraordinary fiscal and monetary actions taken in response to the pandemic have introduced anticipated and unanticipated effects on the market. While the risks associated with higher rates, a strong dollar, elevated energy prices, tighter credit, and severe geopolitical conflicts are significant, the outlook for corporate profits remains constructive. In such an uncertain environment, we derive confidence from our portfolio companies’ proven records of generating durable economic profits in past cycles. Our focus remains on businesses with strong balance sheets, essential products and services, pricing power, and durable cash flows. Beneath the surface of what has been a very narrow market year-to-date, we continue to find value and exceptional execution across the portfolio.
| Representative Account Equity Weighting As of September 30, 2023 |
|
|---|---|
Common Stock |
93.6% |
Cash and Cash Equivalents |
6.4% |
Total |
100.0% |
| Representative Account Sector Weighting As of September 30, 2023 |
|
|---|---|
Communication Services |
6.8% |
Consumer Discretionary |
9.2% |
Consumer Staples |
7.6% |
Energy |
0.0% |
Financials |
25.2% |
Health Care |
14.7% |
Industrials |
11.7% |
Information Technology |
19.3% |
Materials |
5.5% |
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 September 30, 2023 |
|
|---|---|
Berkshire Hathaway Inc |
6.7% |
Alphabet Inc |
6.4% |
Mastercard Inc |
5.2% |
Linde PLC |
5.1% |
Microsoft Corp |
5.1% |
Arthur J Gallagher & Co |
4.6% |
Progressive Corp |
4.4% |
Oracle Corp |
4.0% |
KLA Corp |
3.9% |
Alcon Inc |
3.9% |
Total |
49.4% |
Reported as a percentage of total portfolio. |
|
| Representative Account Portfolio Characteristics As of September 30, 2023 |
|
|---|---|
Composite Assets (mil) |
$794.2 |
Number of Securities Held |
26 |
Average P/E |
25.9 |
Average Market Cap (bil) |
$350.3 |
Turnover (Rolling 12 Months) |
7.34% |
Excludes cash equivalents. |
|
1 BBH’s estimate of the present value of the cash that a business can generate over its remaining life.
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.
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. 2023. All rights reserved.
Not FDIC Insured No Bank Guarantee May Lose Money
IM-13657-2023-10-26 Exp. Date 01/31/2024
