Market and Portfolio Update Q3 2021

BBH Chief Investment Officer Suzanne Brenner and Deputy Chief Investment Officer Justin Reed review the markets and provide an update on our current portfolio positioning and priorities.


Since the beginning of 2020, when the world became aware of the threat of COVID-19, we have witnessed a global pandemic that has affected us all in myriad ways. As we write this in early July 2021, we are saddened to see worldwide statistics of nearly 185 million COVID-19-related cases and 4 million deaths. However, we are heartened to see the tremendous progress made on the vaccine front in 2021, along with the associated declines in new cases, hospitalizations and deaths. We are eternally grateful to all of the scientists, medical professionals, researchers, governmental officials and volunteers who helped to develop and deliver those vaccines in record time. We are also grateful for the relationships we have with our clients, investment managers and colleagues. To all of you, we thank you for your support and continued confidence.

Turning to the markets, we witnessed strong returns across global equities for both the second quarter and year-to-date period ending June 30, 2021. U.S. equities led the pack for the six-month period, and the S&P 500 reached a new all-time high in late June. Almost all sectors have made gains during the year, but in a reversal from 2020, energy, financials and real estate delivered the strongest returns.

Rising inflation has taken center stage in 2021’s economic picture. As of June, the consumer price index (CPI) rose 5.4% year over year, the largest 12-month increase since the period ending August 2008. Removing more volatile food and energy prices, the core CPI rose 4.5% year over year, representing the largest increase of that measure since September 1991. Key drivers of this increase include supply chain bottlenecks, high demand across several categories as pandemic-related restrictions eased and “base rate” comparisons (that is, year-over-year comparisons to the early months of the pandemic when many parts of the economy were trying to reopen).

In response to these trends, the Federal Reserve in its June meeting foreshadowed that interest rate rises could come in 2023, earlier than the market expected. However, Chairman Jerome Powell attempted to dampen the committee’s hawkish forecasts by noting the recovery needs substantial future progress while stressing any future changes to the asset purchase program will be “orderly, methodical and transparent.” Retracing some of the large increases in the first quarter, the 10-year yield landed at 1.47% at the end of June, down from a high of 1.74% in the first quarter.

Investment Returns as of June 30, 2021
Asset Class 3 Months YTD 1 Year 3 Years* 5 Years* 10 Years*
Fixed Income            
1-3 Year Treasury Bonds 0.0% -0.1% 0.1% 2.7% 1.6% 1.2%
U.S.  Aggregate Bonds 1.8% -1.6% -0.3% 4.8% 3.0% 3.4%
Global Aggregate Bonds (USD – Unhedged) 1.3% -3.5% 1.6% 3.6% 2.2% 2.1%
U.S. Municipal Bonds 1.4% 1.1% 4.2% 5.0% 3.2% 4.3%
U.S. High-Yield Bonds 2.8% 3.6% 15.5% 7.2% 7.3% 6.5%
U.S. Leveraged Loans 1.5% 3.3% 11.7% 5.1% 5.0% 4.4%
U.S. Inflation-Linked Bonds 3.5% 1.6% 6.5% 6.7% 4.3% 3.5%
Global Equity (USD) 7.5% 12.6% 39.9% 12.8% 15.2% 10.5%
U.S. Large-Cap Equity 8.5% 15.2% 40.8% 16.6% 17.6% 14.8%
U.S. Small-Cap Equity 4.3% 17.5% 62.0% 13.8% 16.4% 12.3%
Nasdaq Composite 9.7% 12.9% 45.3% 24.9% 25.9% 19.4%
Non-U.S. Developed Equity (USD) 5.4% 9.2% 32.9% 6.7% 10.8% 6.4%
Emerging Markets Equity (USD) 5.1% 7.6% 41.4% 7.8% 13.4% 4.6%
Non-U.S. Developed Equity (Local) 5.0% 13.1% 27.6% 7.8% 10.5% 8.6%
Emerging Markets Equity (Local) 3.9% 8.1% 36.5% 11.4% 14.0% 8.0%
REITs 12.0% 21.8% 38.1% 9.0% 6.4% 9.4%
Gold 3.7% -6.8% -0.6% 10.8% 6.0% 1.7%
Silver 7.0% -1.0% 43.5% 15.5% 6.9% -2.8%
Crude Oil 24.2% 51.4% 87.1% 6.7% 8.7% -2.6%
Bitcoin -41.3% 19.3% 278.1% 34.2% 120.4% 115.4%
*Annualized return figures.
Past returns do not guarantee future results.
Source: Bloomberg

In response to many questions from clients, InvestorView sat down with Brown Brothers Harriman (BBH) Private Banking Chief Investment Officer Suzanne Brenner and Deputy Chief Investment Officer Justin Reed to hear their thoughts about the current state of the financial markets and how developments are influencing portfolio positioning.

InvestorView: With the markets continuing to go up, should clients consider reducing equities?

Suzanne Brenner: Given where valuations are currently (depicted in the nearby chart), now is not a time to take excessive risk, and clients should consider rebalancing back to their asset allocation targets if they are overweight to equities. Having said that, we remain excited about the opportunities our bottom-up concentrated managers are finding. The benefit of having active managers is that we do not have to invest in the most expensive companies and can be very selective and disciplined in our security selection. In addition, when managers are unable to identify compelling investments, they can hold cash, which provides downside protection in such an environment. For example, many of our managers were holding cash in early 2020 as valuations were reaching new highs. This allowed them to take advantage of the COVID-19-driven downturn in early 2020 to purchase equities at attractive valuations, and as a result, they delivered particularly strong returns thereafter. Interestingly, our Balanced Growth policy portfolio remains close to fully invested, suggesting that our active managers see significant long-term appreciation potential within their concentrated portfolios.

Market Index TTM P/E
(as of 6/30/21)
10-Year Average
S&P 500 TR USD 26.5 19.5
Russell Mid Cap TR USD 23.4 21
Russell 1000 TR USD 26 21.8
Russell 2000 TR USD 17.8 18.9
Russell 2500 TR USD 20 19.5
MSCI EAFE NR USD 20.2 15.6
MSCI World NR USD 24.1 17.8
MSCI ACWI NR USD 22.8 17.1
Past performance does not guarantee future results.
Source: Morningstar.

Justin Reed: I agree and would add that, within our public equities portfolio, we invest in high-quality companies that have strong free cash flow profiles, sustainable competitive advantages and strong management teams that seek to reinvest capital at high rates of return. There simply are not 500 of these companies in the U.S., which is part of the reason why we tend to invest with managers who focus on identifying a concentrated number of companies that fulfill these criteria. To put some data around this, our Balanced Growth portfolios have approximately 200 underlying public equity positions globally, and the top 10 positions represent nearly 25% of the public equity portfolio. We believe that this concentrated approach is the only way to deliver returns that exceed passive indices. But I would caveat that investors have to be patient and live through below-index periods in order to get those strong returns.

IV: One of the other concerns we hear from our clients is that inflation is rearing its head. How are you thinking about inflation, and what can protect portfolios against this risk?

SB: Inflation is the biggest risk our clients face in their portfolios over the long term. For instance, 2% inflation for 25 years results in a 40% decline in purchasing power. We take this risk very seriously and believe the best protection against inflation is equities.

Looking at historical data, equities have far outpaced inflation over many periods. For example, for the past 50 years, the S&P 500 has generated a 10.9% return, and inflation has been 3.8%. We recognize that equities may not protect portfolios in the short term, as it may take some time for companies to reprice their goods and services to adjust to the inflationary environment. In fact, commodities have provided the best protection against inflation in the short term. But if you look at long-term periods (as shown in the nearby chart), commodities have not produced strong returns. We are long-term investors, and we know that you can’t time the markets perfectly, so we prefer to invest in the securities that can provide the best long-term returns.

Market Index 5-Year 10-Year 20-Year 30-Year 40-Year 50-Year
S&P 500 17.14% 14.36% 8.34% 10.46% 11.82% 10.94%
S&P GSCI 6.95% -3.04% 4.44% 3.35% 1.91% 3.19%
U.S. CPI  2.30% 1.76% 2.10% 2.31% 2.78% 3.87%
(Less Food & Energy)
2.21% 2.09% 2.01% 2.25% 2.90% 3.80%
Past performance does not guarantee future results.
Data as of May 31, 2021.  
Source: Morningstar.

JR: To put a finer point on why our equity portfolios are positioned to provide the best long-term returns, it is helpful to consider the types of companies our managers own. As I alluded to earlier, we prefer to invest with companies that have some sort of sustainable competitive advantage, which tends to be associated with pricing power. A company with pricing power can raise prices on its products and/or services, capturing any rise in inflation. Take, for example, two top holdings in our Domestic Qualified Taxable Balanced Growth portfolio: Visa and Mastercard.1 These companies derive a substantial portion of revenue from the percentage of volume processed over their networks. For example, as inflation increases the nominal value of purchases on the network, Visa’s respective revenue will grow commensurately. Another company in our portfolio worth highlighting is Moody’s, which produces a range of credit ratings, research and analytics products that are essential to its users – most notably within the credit ratings business.2 Moody’s takes, on average, 3% to 4% price increases across its business segments every year, but those rates could be much larger depending on inflationary conditions. While these examples focus on public equities, it is worth noting that our private equity managers also own companies that have, or are creating, a competitive advantage – which should lead to pricing power as well.

For certain clients, we also believe that an allocation to real estate is helpful in protecting the purchasing power of portfolios. Historically, real estate has proven to be a useful asset in terms of inflation protection. Our investment research group has been looking at ways to partner with compelling real estate managers who have dedicated expertise in specific markets and/or property types.

IV: Rising inflation and interest rates could negatively affect fixed income portfolios. How do you think about fixed income in your portfolios?

SB: We have been wary of rising interest rates for a while. As a result, we have recommended that clients’ fixed income portfolios be invested in short-duration securities and that longer-duration bonds only be purchased opportunistically as higher interest rates allow. Typically, the duration of our short-term bond funds has been between nine months and one year, and as a result, they will not be as negatively impacted by interest rate increases. For example, if you have a 1% interest rate increase and a five-year duration, the portfolio will decline (all else equal) by 5%. A nine-month duration will have a much lower decline because of interest rate moves. Looking at representative indices, we have seen this hold true. We also will continue to look for opportunities to increase our exposure to longer-duration securities when rates rise back to levels that compensate investors for interest rate risk. However, 10-year AAA muni bonds are trading at a 0.85% yield, which is not attractive.

JR: We are often asked about the reasons for investing in fixed income in such a low interest rate environment. We believe that fixed income still has a place, as it fulfills two of its three roles – liquidity and stability. Unfortunately, the third leg of the stool, yield, is not as attractive today. Investors were accustomed to earning a meaningful yield on bonds, but now the yield has been reduced, which you can see quite clearly in a long-term chart of 10-year Treasury bond yields or even by looking at the yield curve over the past 10 years.



This graph shows the 10-year Treasury bond yield from January 31, 1962, to June 30, 2021, with the latest figure being 1.468%. The chart illustrates that yield is not as attractive today in fixed income. Investors were accustomed to earning a meaningful yield on bonds, but now the yield has been reduced.

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This graph shows the U.S. Treasury yield curve as of certain dates – June 30, 2011; December 31, 2019; August 4, 2020; and June 30, 2021.

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It is also worth mentioning that strategies like direct lending have enabled clients to earn a high yield, and they may actually be even more attractive in a rising rate environment. Most of these strategies involve loans to companies that incorporate floating rate features that will rise in the event of interest rate increases.

IV: Let’s turn to another topic that has gotten a lot of press: bitcoin. While the price of bitcoin has come down recently, clients are still interested in our views on this “asset class.”

JR: As investors, we are always looking at topics like this and considering implications, risks and opportunities, particularly as they relate to our existing portfolio companies. As a result, we have spent time trying to understand the larger “crypto” landscape, which we define much more broadly than just cryptocurrencies, or even more specifically, bitcoin. We believe that the core technologies of blockchain and cryptography are likely valuable. Regarding bitcoin and other cryptocurrencies more specifically, we believe it is difficult, if not impossible, to determine which cryptocurrencies will succeed or fail over the long term and, given a lack of associated cash flows, find it impossible to determine their intrinsic value. So, we won’t be recommending an allocation to bitcoin in our policy portfolios any time soon but will stay abreast of new crypto developments.

I should highlight that we do have some crypto-related exposure within our portfolios. Several payments-related companies, such as Square, have begun accepting payments in various cryptocurrencies, while other companies have started leveraging blockchain technology to enhance their operations.3

SB: What we won’t invest in differentiates us from other private banks. We look at every asset class to learn and determine how investable they are, but we won’t invest simply because others are doing so. We have firm investment criteria, and it is important that we know what we own and why we own it. As Justin alluded to, with bitcoin, it is impossible to know the value of the asset. Bitcoin has no cash flows, and therefore is only worth what someone else might pay for it. There are many assets like that – art, gold, even the dollar. While many have made money investing in these assets, we prefer to stand on the sidelines because our promise to clients is to first reduce the likelihood of permanent loss of their capital and then to grow it. With the possibility of binary events inherent in some of these assets (for example, a painting may no longer be valuable to others, or bitcoin may be disrupted by government regulations), we would be unable to keep that promise.

JR: That resonates with me, as one of the things that brought me to BBH was our thoughtful investment approach that emphasizes bottom-up investing – which requires that we know what we own and understand the investments’ cash flows in order to estimate an intrinsic value. We won’t just fill buckets on a top-down basis. That said, we are flexible and creative in our thinking so that we can evolve and provide the best investments for our clients. There are a number of examples that prove this out.

SB: That’s right. I think back to 2019 when distressed investing was out of favor, and we made a commitment to a manager through a drawdown structure that charged no fees until capital was called. Few investors were thinking about distressed at that point, but we believed that at some point there would be a turn in the credit cycle and that if we didn’t tee up the investment before it turned, we might miss the opportunity. We never predicted that COVID-19 would be the reason for the turn in the cycle, but once it occurred, we were prepared to immediately deploy capital into very high-quality high-yield securities whose prices collapsed. These opportunities didn’t last long, but we were able to capture them for our clients because of that foresight.

JR: It is important to have an investment philosophy that is fundamental to everything we do, but at the same time be a learning organization. We must adapt to market environments and take advantage of compelling opportunities. We continue to capitalize on our robust BBH network to source exclusive opportunities that we believe are well positioned to generate strong returns in the coming years.

IV: Clients are worried about the possibility of a capital gains tax increase. How are you thinking about this possibility?

SB: This is a nuanced question. First, I would say we should look back at history. When capital gains tax increases occurred in the past (per the nearby chart), the markets only suffered losses in one out of 10 one-year periods following the tax increase. Why is that? Because markets do not react to only one development. A multitude of factors can impact the markets. We just don’t know what market participants will weigh more heavily in their decision-making. Therefore, selling equities simply to avoid a higher capital gains tax may fail to produce the results that investors are seeking to achieve. We believe in being long-term investors, and if there is volatility in the markets that is created by tax changes, we think it will produce opportunities for our active managers to invest in high-quality companies at more favorable prices.

Notwithstanding our thinking here, we have advised our clients to discuss tax planning with their wealth advisors. In this environment, it is particularly important that the proper planning is done.


S&P 500 One-Year Return After Capital Gains Increases
1968 7.66%
1969 -11.36%
1970 0.10%
1971 10.79%
1972 15.63%
1976 19.15%
1987 2.03%
1991 26.31%
1993 7.06%
2013 29.60%
Past performance does not guarantee future results.
Source: Bloomberg.

JR: I would also note that one of the important issues for our team when evaluating managers is to understand the after-tax (and after-fee) return. All of our public equity managers take a long-term approach. Accordingly, their portfolio turnover is generally low, and the portfolios are tax-efficient. We invest with managers that buy the stocks of companies that can compound capital over long periods (e.g., five to 10 years). They are willing to hold stocks even if the market does not recognize their value in the short term, because they look to the underlying fundamentals of the company. At the end of the day, the return for a company should reflect the growth in earnings and the return on capital that the company can achieve. As Suzanne said, our managers actually see volatility as opportunity, as do we. Short-term market declines are simply opportunities to buy great companies on sale.

IV: There appears to be increasing focus on sustainable investing across the industry. How are you approaching the topic?

SB: Before answering that question, I find it helpful to define how we think about sustainable investing, as a lot of people use many of these terms interchangeably. At BBH, “sustainable investing” includes three separate categories: environmental, social and governance (ESG) investing, socially responsible investing (SRI) and impact investing.

ESG investing involves incorporating environmental, social and governance criteria into investment decision-making. Our investment approach, which emphasizes owning the securities of high-quality companies that can sustainably grow over a long period of time, aligns well with ESG investing. In fact, all of our managers consider ESG factors in their investment approach.

SRI reflects personal or institutional values in portfolios, and we seek to work with clients to customize their portfolios to align with these values.

The third category is impact investing, which involves making a direct investment to further a specific cause. Funds in this category proactively seek to make a positive impact on a defined goal. Our team partners with clients to identify impact managers that meet their specific goals and interests.

It is important to stress that you do not have to sacrifice returns when implementing a sustainable investing program. Of course, at the other end of the spectrum is philanthropy, where clients can make an impact by creating philanthropic initiatives that reflect their values but do not expect a financial return.

JR: Our team also intentionally desires to make an impact through our investment process. This gets at a concept we refer to as “lowercase i, uppercase I.” Suzanne just referred to our “uppercase I” – impact investing – which refers to a specific investment, whereas “lowercase i” can refer to an investment or business practice that also creates a positive impact. An example of a way we create “little i” impact is our investment manager search process, which involves the initial sourcing of managers within a particular asset class or opportunity. Our team ensures that we are looking at creative ways to source investment managers, spending extra time finding resources that may lead us to diverse – and sometimes overlooked – investment talent. In finding the best managers, we must ensure that we are seeing the full universe of investment talent at the top of the funnel. It is just one small step that we are making to enhance the probability that we find uniquely impressive investment talent for our clients while potentially improving equality of opportunity from a social perspective.

IV: One final question. As we are having downtime in the summer, is there anything interesting you and the team have been reading?

SB: We have a team book club, and the last few books we have read include Brian Bares’ “The Small-Cap Advantage,” Morgan Housel’s “The Psychology of Money” and “Blockchain Revolution” by Don and Alex Tapscott. I’d be remiss if I didn’t also mention “Inside Money: Brown Brothers Harriman and the American Way of Power” by Zachary Karabell.

JR: Our team really does love to read. I know for a fact that many of us read letters from our managers as our nighttime reading, which is slightly embarrassing but maybe reflective of the fact that we are in the right line of work. That said, I’ve had some recent conversations with my colleagues about several books they are reading. One of those books is “Noise: A Flaw in Human Judgment” by Daniel Kahneman, Olivier Sibony and Cass Sunstein. Another is Adam Grant’s “Think Again.” And one on my personal bucket list is Katy Milkman’s “How to Change.”

IV: Thank you, Suzanne and Justin, for the update.

Portfolio holdings and characteristics are subject to change.

Past performance does not guarantee future results.

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.


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1 Within the Qualified Taxable Balanced Growth equity portfolio, Visa and Mastercard represent 1.2% and 2.8%, respectively, as of June 30, 2021.
2 Within the Qualified Taxable Balanced Growth equity portfolio, Moody’s is a 1.6% exposure as of June 30, 2021.
3 Within the Qualified Taxable Balanced Growth equity portfolio, Square is a 2.9% exposure as of June 30, 2021.

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