Founded in 1993, Brown Advisory, with AUM of $81 billion, is an independent investment management firm with offices in the US, London and Singapore. The firm manages assets for both private and institutional clients. The London office opened in 2008 and is where the portfolio managers of the Global Leaders strategy ($955 million) and the Global Leaders Sustainable UCITS Fund which was launched in November 2019, are based.
Bertie Thomson and Mick Dillon are the co-portfolio managers of the Global Leaders strategy.
Prior to joining Brown Advisory in October 2015, Bertie spent 13 years at Aberdeen Asset Management where he became a Senior Investment Manager in the Pan European equity team. Bertie graduated with a MA in Architectural History from the University of Edinburgh and is a CFA charterholder.
Mick joined Brown Advisory in 2014 from HSBC Global Asset Management in Hong Kong where he was the co-head of Asian equities. Previously, he managed a global equity long/short fund for HSBC in London and before that, was a global technology equity analyst at Arete Research. He graduated from the University of Melbourne, where he was awarded a Bachelor of Engineer (First Class Honours), a Bachelor of Commerce and a Bachelor of Science. He is also a CFA charterholder.
How does the London office collaborate with the US office?
One of the reasons we were attracted by Brown Advisory is the breadth and expertise of its US equity research team and we very much view ourselves as one team. Bertie and I speak to colleagues every day in our US office and travel together regularly, in fact I’m going over there later today.
How would you describe your investment style?
Long term, quality focused. Very price conscious – we have to see value.
We use valuation based metrics as one tool to reduce our investment universe but screens are a pretty blunt tool. The best source of ideas is our analysts. We are looking to invest in companies run by managers who think like investors. We are looking to forge long term relationships. We look through the short term noise.
Currently it is 92% but it is often higher.
We think about how a business will look in five years. A minimum holding period would be three years. Six years is our average turnover.
Buy backs or dividends?
Buy backs look smart at one price and dumb at another! Whether we prefer buy backs or dividends depends on the valuation creation opportunities and other capital allocation opportunities. Sometimes internal investments are the best use of capital or de-leveraging or M&A or buy backs. We like management to think about capital allocation holistically.
Do you vote proxy for foreign shares?
Number of holdings in Global Leaders Fund?
Average position and largest position?
7% (approx $67m) is the largest position and >3% ($30m) is the average.
Talk about some of your larger holdings
Mastercard enables an incredible customer outcome. It makes your ability to pay for things so much easier – rather than lugging round cash everywhere. And it also makes life for the merchants so much easier in terms of keeping track of their accounts and taxes. So, managing global payment flows be it from a consumer, a merchant or even from a financial perspective – it makes it easier for all participants. And for us, taking away that friction in payment solves a problem for each of its customers. That’s something we look for all the time – companies that solve problems for their customers. And Mastercard definitely does that.
Unilever – one of the things we really like about Unilever is the way their brands help people. Their focus on sustainable living. Increasingly, the products they bring to market they want to have purpose for their customers’ lives. The customer is happy as they get a great product, but we are also very happy as we get a very long term 20% return on invested capital. This sort of win/win where the customer does well and it leads to us doing well as shareholders – that’s something we also look for.
JP Morgan – when you look at what customers think of JP Morgan, they solve problems for their corporate customers in terms of cash management and cross border payment flows. And they are either #1 or increasing share in investment banking, equity capital markets, debt capital markets, research. They are doing something special for their customers. That for us, is very differentiated. It’s a good outcome for us as it has a return on assets of 1.3% which is by far and away one of the best banks in America on a ROA basis. It has very long term management. Jamie Dimon has been CEO for over a decade, and that’s something we like. Either it’s a founder or a family or multi-generational families or its management have been running the business for a decade or more. Because we know that their time horizon will match up with our time horizon.
Atlas Copco – it’s a Swedish industrial that principally makes compressors and vacuum pumps. We’ve held this business since inception. We like the long term focus they have on the customer. We like the focus on the aftermarket and providing spares and services to the customers and users. We also like their outsourced business model as it means they’ve been able to successfully limit the impact of any economic volatility on their business in retaining cash flows and very high returns. The company is very focused on benefitting its stakeholders through environmental, and certainly energy related solutions. They look for 30% energy saving on their new compressors and that provides what we call a triple win – a win for the customer, a win for the shareholder but also a win for the environment. So, the customer benefits as there is less energy consumption and the shareholder benefits as Atlas can charge more for its compressors and lastly the environment benefits as well. So, it’s a good company that is very long term focused, very cash generative and is also focused on doing good – not just for the customer and the shareholder, but for wider society.
Edwards Life Sciences – we like the customer outcome. Edwards has an incredibly strong position in the transcatheter aortic heart valve market. They have expanded the treatment of care away from surgical heart valves into heart valves that now have a much easier treatment profile and a much better customer outcome. It is a lot better for key decision makers – heart surgeons and hospitals. They are changing patients’ lives and the healthcare system and making it more efficient. Also, the management team; the CEO has been at the helm for nearly 20 years and has been very effective in the patient oriented and long term strategy.
Do you have an exclusion list?
We think it is more important to look at ESG holistically and look at the positives and negatives of the business as a whole. We ask ourselves is the business creating risk because of its practices? We think about ESG in terms of material and meaningful. Is a positive or a negative ESG factor a material part of the business? Is it meaningful in terms of is the company doing something that is different from the industry? We’ve created a sustainable screened version of the fund for clients in the Nordics who have hard limits but we typically approach ESG in a much more holistic way.
For example, we own Safran, a French A&D business which generates the majority of its cash flow through its aero engine business. It is focused on reducing fuel consumption and Co2 output. It has a lot of environmental and energy efficient solutions, but it has a legacy defence business (<10% of revenue). The majority of the business is very ESG compliant but because of the legacy business, if you used a hard screen, you would screen that out. Safran has a lot of positive ESG characteristics in spite of its legacy defence business. We have engaged with the company about this and the R&D for this business is funded by the French government and they take that technology and apply it to the civil aerospace business.
Any recent sales and why?
The only two companies we sold last year were Cognizant and 3M. We sold 3M due to a change in management and capital allocation strategy.
Do you have to meet management before you buy a stock?
Typically we do meet management before we invest in any company, frequently we will meet with them several times. In addition, we do as much primary research as possible via the entire eco system in terms of speaking to customers, suppliers, competitors, employees and former employees.
MiFID II – how has it affected you?
MIFID II has affected everyone. It has been beneficial in concentrating the mind about efficient use of resources and what kind of return or benefit we are getting out of working with different intermediaries in the market. We will continue to develop as many relationships as we can ourselves without the need of intermediaries. As fiduciaries, we really should be speaking to the companies we invest our clients’ capital into and there shouldn’t be a misalignment of interests via intermediaries in the marketplace. So more direct access and more use of independent IR firms like Phoenix-IR.
Best companies at IR?
Atlas Copco – very timely and helpful investor days every year. Disclosure at the company level is very helpful. When they release their results there’s a huge amount of information and all the financial details are provided in Excel format. It is symbolic of their transparent and stakeholder focused approach.
Schindler – their quarterly conference calls are often 1 – 2 hours because of management’s enthusiasm and willingness to explain their business. They keep the conference call going until people have run out of questions. It’s very rare that we finish one of those calls and we’ve still got questions. Just the comprehensiveness.
Any tips about how companies should communicate with Brown Advisory?
We would encourage companies to discuss the long term and not worry about the next quarter’s results. We would encourage them to drop EPS forecasts and focus on the customer which ultimately drives the economics of the business. We think it’s important for companies to engage as much as they can with people who represent long term owners over other participants such as short term investors who are just renting the economics of the business. Finally we think it’s important for management not to worry about their share price and instead focus on delivering value for their customers; at the end of the day remember you can’t control equity markets.
Why should corporates target Brown Advisory in London?
We are very long term focused and want to build strong partnerships with multi-generational families, founders or management who are also long term focused, want to create value for their shareholders and think about their role in society. We support our companies through volatile times and aim to provide them with a business owner perspective. We believe that ultimately the stock market will recognise businesses that create compounding value.
This interview also appeared in the 2020 Spring edition of IR Magazine.