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Mar 27, 2020

Fund manager profile: 'Forget EPS – focus on the customer'

Brown Advisory focuses on the long term and encourages its portfolio companies to do the same

Founded in 1993, Brown Advisory is an independent investment management firm with offices in the US, London and Singapore. With assets under management of $81 bn, 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 mn) 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, Thomson spent 13 years at Aberdeen Asset Management where he became a senior investment manager in the pan-European equity team. He graduated with an MA in architectural history from the University of Edinburgh and is a CFA charterholder.

Dillon 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. Prior to that, he was a global technology equity analyst at Arete Research. He graduated from the University of Melbourne with a BA in engineering, a BA in commerce and a BSc. He is also a CFA charterholder.

How does the London office collaborate with the US office?

Mick Dillon: 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. We 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?

MD: Long term, quality-focused, very price-conscious – we have to see value.

What screens do you use?

Bertie Thomson: 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.

What's your active share?

MD: Currently 92 percent but it is often higher.

What's your investment horizon?

MD: 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.

Buybacks or dividends?

BT: Buybacks look smart at one price and dumb at another. Whether we prefer buybacks or dividends depends on the valuation-creation opportunities and other capital-allocation opportunities. Sometimes internal investments are the best use of capital, or deleveraging, or M&A or buybacks. We like management to think about capital allocation holistically. 

Do you vote your proxy for foreign shares?

MD: Yes.

What's the number of holdings in the global leaders strategy?

BT: Currently 31.

What's the average position and the largest position?

BT: The largest position is 7 percent (around $67 mn) and the average is more than 3 percent ($30 mn).

Can you tell us about some of your larger holdings?

MD: 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, merchant or even financial perspective, makes it easier for all participants. 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. 

One of the things we really like about Unilever is its focus on sustainable living and how its brands help people. Increasingly, it wants the products it brings to market to have purpose for its customers’ lives. Customers are happy as they get a great product, but we are also very happy as we get a very long-term 20 percent return on invested capital. This sort of win/win where the customer does well and it leads to us doing well as shareholders is something we also look for.

When you look at what customers think of JPMorgan, the firm solves problems for its corporate customers in terms of cash management and cross-border payment flows. And JPMorgan is either number one or increasing share in investment banking, equity capital markets, debt capital markets and research. It is doing something special for its customers and that, for us, is very differentiated. It’s a good outcome for us as it has a return on assets of 1.3 percent, which is by far and away one of the best banks in America on a return-on assets basis. It has very long-term management: Jamie Dimon has been CEO for more than a decade, and that’s something we like, because we know the company’s time horizon will match up with ours. 

BT: Atlas Copco is a Swedish industrial that principally makes compressors and vacuum pumps. We’ve held this business since inception. We like the long-term focus it has on the customer, and the focus on the aftermarket and providing spares and services to the customers and users. We also like its outsourced business model as it means it’s been able to successfully limit the impact of any economic volatility on its business in retaining cash flows and very high returns. 

The company is very focused on benefitting its stakeholders through environmental and energy-related solutions. It looks for 30 percent energy saving on its new compressors and that provides what we call a triple win: the customer benefits because there is lower energy consumption, the shareholder benefits because Atlas can charge more for its compressors and the environment benefits as well. 

That makes it a good company that is very long-term focused, very cash-generative and also focused on doing good – not just for the customer and the shareholder, but also for wider society. 

With Edwards Life Sciences, we like the customer outcome. Edwards has an incredibly strong position in the transcatheter aortic heart valve market. It has 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 such as heart surgeons and hospitals. It is changing patients’ lives and the healthcare system and making it more efficient. We also like the management team at Edwards: 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?

BT: We think it’s more important to look at ESG holistically and look at the positives and negatives of the business as a whole. We ask ourselves whether the business is 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 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 that have hard limits but we typically approach ESG in a much more holistic way. 

For example, we own Safran, a French A&D business that generates the majority of its cash flow through its aero engine business. It is focused on reducing fuel consumption and CO2 output and has a lot of environmental and energy-efficient solutions, but it has a legacy defence business (less than 10 percent 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. But Safran has a lot of positive ESG characteristics in spite of this. We have engaged with the company about this and the R&D for the legacy business is funded by the French government; Safran takes that technology and applies it to the civil aerospace business. 

Any recent  sales? If so, why?
MD: 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?

BT: Typically, we do meet management before we invest in any company – we will often meet with management several times. In addition, we do as much primary research as possible via the entire ecosystem in terms of speaking to customers, suppliers, competitors, employees and former employees.

How has Mifid II affected you?

BT: 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 for 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. 

What are some companies that have outstanding IR?

BT: Atlas Copco – very timely and helpful investor days every year. Disclosure at the company level is also helpful. When it releases results there’s a huge amount of information and all the financial details are provided in Excel format. It is symbolic of the firm’s transparent and stakeholder-focused approach. 

MD: Schindler – its quarterly conference calls are often one or two hours because of management’s enthusiasm and willingness to explain the business. It keeps the conference call going until people have run out of questions. It’s very rare that we finish one of those calls and still have questions. 

Any tips about how companies should communicate with Brown Advisory?

MD: 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 the share price and instead focus on delivering value for customers – ultimately, remember that you can’t control equity markets. 

Why should corporates target Brown Advisory in London?

BT: We are very long-term-focused and want to build strong partnerships with multi-generational families, founders or management teams that 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 the stock market will ultimately recognize businesses that create compounding value.

Gill Newton is a partner at Phoenix IR, an independent investor relations consulting firm that also operates Corporate Access Network

This article was originally published in the spring 2020 issue of IR Magazine

Gill Newton

Gill Newton

Gill Newton of Phoenix IR
Partner at Phoenix-IR