There is more than one way to be a quality-focused fund manager when it comes to global equities, according to Brown Advisory’s Bertie Thomson, who says those who fail to learn from their mistakes or make the best use of their capital will be doomed to underperform.
In what has become an extremely competitive space, a handful of funds have come to dominate the IA Global sector and a number of those funds have specialised in one investment style: quality.
Yet, while managers such as Terry Smith, Nick Train and Michael Lindsell focus on companies with strong economic moats and well-known brands, the team behind the $278m, five FE Crown-rated Brown Advisory Global Leaders fund take a slightly different approach.
“We have a quality approach, but we think it’s a quality approach that is different from other managers principally because we focus on the most important person in any company’s value chain and for us that’s the customer,” Thomson explained.
“Most investors overlook the customer, but if you don’t have a customer, you don’t have a business.
“We’re looking to find companies that do something special for their customers and see them coming back time and time again.”
Companies with that relationship, said the manager, will have ‘outstanding’ economic return on investment, generating lots of free cash flow.
Performance of stocks over 5yrs
Source: Yahoo Finance
Two holdings geared into this theme both as a provider of services to consumers and a beneficiary are Visa and Mastercard.
“These are parallel monopolies with a huge structural growth behind them from the cashless society,” Thomson said.
“The majority of consumer transactions are still done with cash, the barriers to entry are very strong, they’re both networks, they have a huge amount of latent pricing power, and I think they’ll be able to comfortably grow through any recession.”
Another way in which Thomson said Brown Advisory Global Leaders differs from its peers is its focus on valuation.
“At the end of the day, this isn’t an academic exercise,” he explained. “We’re here to make money for our clients, so we have to buy these assets when we think they’re undervalued.”
As such, the process has taken the team to market all over the world, including emerging markets such as India, China and the broader Asia region.
One area that the manager has lower exposure to, however, is the UK. But not for the reasons that many may expect.
The UK equity market has been one the most unloved area by international asset allocators since the EU referendum, according to the Bank of America Merrill Lynch Global Fund Manager Survey, as concerns over Brexit persist.
Net % of asset allocators say they are overweight UK equities
Source: BofA Merrill Lynch Global Fund Manager Survey
However, for Thomson it is more a question of valuation than of the UK’s future trading relationship with the bloc.
“We would love to invest in more UK companies, but the problem that we find is that there’s huge scarcity value in the UK, Europe and also Japan,” he said.
“Those are three areas in the world where good companies with high returns and good customer outcomes trade at big premiums to the average companies those geographies.”
“Investment is in many ways like watching paint dry,” he added. “We need to remain very disciplined and not be what Warren Buffett calls a ‘busy fool’ – doing something for the sake of activity.
“We need to buy these assets when they’re undervalued because we really believe that markets are inefficient over the short term but more efficient over longer time periods.
“Unfortunately, in the UK market for the companies that we like, we haven’t had that moment of inefficiency. But we remain vigilant.”
Unlike the rest of the industry, he said, where everybody focuses their energy on picking winners and avoiding losers, the Brown Advisory team focuses on capital allocation and making sure it has the maximum amount in the stocks that have the best returns.
“This is what the Americans call, in baseball terms, your ‘hit rate’, how often do you connect with the ball versus your ‘slugging percentage’, which is when you connect with a ball and how many bases you win,” Thomson said.
“The reality is you can underperform even if you have a great hit rate, but the converse is true that you can outperform if you have a lousy hit rate, and the difference is slugging percentage.”
In terms of capital allocation, the team aims to have the large part of the fund’s net asset value in the most productive stocks and does not adhere to a factor model.
And it also takes a more analytical approach to investing.
“We think human beings are uniquely disadvantaged,” he said. “We are doing a 400-year-old job with a 2-million-year-old brain. Most of our behaviours are driven by the time we lived in caves.
“So how do we get over that? We embrace that, we remain humble, and we work with a third-party consultant.”
The consultant has access to all of the team’s trades and thoughts and is able to analyse behaviours that helps put in place rules “to limit the damaging impact of human behaviour”. This approach, Thomson said, has added value to the process and is likened to coaching for fund managers.
“In so many other professional endeavours you have a coach. You’re Roger Federer hitting tennis balls? You have a coach. You’re a concert pianist? You have a coach,” the Brown Advisory Global Leaders manager explained.
“Yet most fund managers are arrogant enough to think that they can’t improve. We totally disagree with that. We believe with the right feedback, the right data, and most importantly, the right mindset, you can actually get better. And that’s why we work with these coaches to improve our returns.”
Thomson oversees Brown Advisory Global Leaders, which is built around a concentrated portfolio of 30-40 investments, alongside lead manager Michael Dillon.
Performance of fund vs sector & benchmark over 3yrs
Source: FE Analytics
The Brown Advisory Global Leaders fund has made a total return of 64.04 per cent over the past three years, compared with a 35.93 per cent gain for its average IA Global peer. It has an ongoing charges figure (OCF) of 0.42 per cent.