The 10 picks of the $5.7 billion fund manager
- Buying companies with global leadership positions in their industry can be a smart investment game.
- The manager of a $5.7 billion fund that focuses on this told Insider why.
- He’s also picked 10 companies that exemplify what he’s looking for in a stock pick.
Rather than massive capitalizations or dominant market shares, the primary reason companies are included in the $5.7 billion Brown Advisory Global Leaders Fund is their ability to solve problems.
For co-managers Mick Dillon and Bertie Thomson, their selection process is not based on their vision of what constitutes leadership, but on that of the end customers.
“If you are the best problem solver for your customer, they will see you as the leader. They will come back, generating great business over time. don’t have a business.”
Global Leaders contains a wide range of names, from the highest position Microsoft, to other big names one would expect to demonstrate the criteria of the duo: companies with competitive advantages; strong management teams; pricing power; higher than industry margins; and a high return on invested capital.
In search of such characteristics, it is perhaps not surprising that Alphabet, rock, Tencent and Unilever are among the fund’s top 10 positions.
Managing a concentrated portfolio of 30-40 names, 32 of which are currently held, one might wonder whether transactions can get crowded or slip into “expensive” territory. Still, Dillon stresses that valuations are critical, both as a fund manager but also from a client perspective, noting the distinction between price and value.
“Price is a first point of comparison for many of us, but if you do a really good job for your customer, they start paying for value.”
He gave the example of distribution. “It must be in stock, right?”, reminiscent of the early days of the pandemic of empty shelves, when toilet paper and flour saw their true value skyrocket as supply is becoming scarce.
The pandemic has sparked a new wave of ideas for the Brown Advisory team which had previously fallen short of its price targets. One area under more recent scrutiny is that of health care.
“We really like healthcare companies because they really help people, but our issues have been around valuations,” Dillon said. After being underweight in healthcare for years, we are finally starting to see some of these companies enter ranges where we can see double-digit internal rates of return. [IRR, which can indicate future profitability] over five years, which we find very interesting.”
Pricing power and solid margins are two sought-after fundamentals, especially in times of rising inflation. These are rarely better illustrated than at the cosmetics giant Estee Lauder.
Touching all facets of manufacturing, distribution and consumption, labor shortages, raw materials, wages, logistics and oil, the official sees the problem as not only whether companies can pass on the higher costs, but whether their customers can afford them.
Take for example a US-based paint manufacturer that produces antibacterial paint for hospitals. “Talk about solving someone’s problem. What’s the biggest risk in a hospital? Reinfection rates. But if their costs go up and they manage to pass it on, can hospitals really afford to pay more ?”
Although this company has piqued their interest, its limited ability to actually pass on the higher costs means it remains out of the portfolio.
Dillon explained the importance of the price elasticity of demand and gross margin – the latter for Estée Lauder being 75%, he said, meaning that if production costs increased by 10 %, it would only have to reach 2.5% to cover the cost of goods sold. Although people will continue to fall, any predicted price rise will seem less extreme.
“How much will people notice a 4% increase in the price of a face cream when gasoline prices have doubled?” he asks.
Next to Visa, MasterCard, German Stock Exchangeand other financial names in the portfolio – despite the ongoing debate over the sometimes unnecessary nature of sector classifications – one name emerged when pressed for a “preferred” holding.
While Dillon’s respect for the microlender Bank Rakyat Indonesia was palpable, he would still resist falling in love with the stock if the price exceeded his comfort level. So, although the bank has been in the portfolio since its inception, it has been bought or sold several times since 2015, purely on price.
“It’s a great business. They offer working capital loans to start small businesses in rural villages in Indonesia. They set up kiosks in the wet markets of Jakarta, take money from merchants, lend it to people for them to set up in, say, a motorcycle repair shop, so they can buy inventory to fix other people’s problems. From an ESG perspective, that’s just gold. view of an investor, we are happy to earn money.