Brown Advisory Ethical Selection Q3 2022 commentary
|Asset classes||US Stocks|
|Investment style||Fundamental analysis focused on ethical, social and governance (ESG)|
|Quarterly return||-6.04% (net of fees)|
|Annualised volatility (since inception)||23%|
During the third quarter, there was strong performance within financials and industrials, which was offset by weakness in consumer discretionary (largely due to the strategy’s omission of Tesla) and healthcare.
The third quarter was largely a continuation of many of the themes seen broadly throughout 2022. Investors—and markets—are struggling with how to decipher many economic indicators that in some cases seem to tell different stories. On one hand, the economy appears quite resilient—business activity remains robust, consumer spend remains elevated with little distinction between high- and lower-end consumers, and there is a noticeable onshoring of many supply chains.
On the other hand, investors are fearful that a confluence of factors suggests challenges ahead. Central banks in many areas around the world are hiking interest rates to curb high inflation and slow the economic engine fueling this inflation; the Fed is reducing its balance sheet, and thus, reserves in the banking system. The geopolitical instability is bolstering the threat of an imminent and potentially deep recession.
Portfolio performance (net of fees)
|Since inception (March 2019)||38.14%|
Best-performing positions in Q3 2022 (note that the performance shown for the quarter reflects the performance of the security during the part of the quarter it was owned by Brown Advisory, not necessarily the performance of the security itself for the full quarter)
- United Rental’s demand and fleet productivity remain strong despite investors' concerns regarding construction activities.
- First Citizens reported a strong quarter and announced a large share repurchase plan, with suggestions that they will still have plenty of excess capital to re-up when finished.
- Charles Schwab provided an attractive opportunity for equity investors. The company has underperformed both the market and peers materially year-to-date due to concerns regarding ‘cash sorting’, which ultimately have proved to be less bad than expected, thus far.
- Interim CEO Howard Schultz led an upbeat Investor Day for Starbucks in mid-September that outlined an accelerated growth algorithm for the next three years. The company also introduced its new CEO, Laxman Narasimhan.
- Expectations were low going into second quarter earnings, but Amazon's e-commerce business surprised on both the top and bottom lines—indicating that downward trends were inflecting positive. Amazon’s cloud and advertising businesses remain strong, growing 33 percent and 21 percent, respectively.
Worst-performing positions in Q3 2022 (note that the performance shown for the quarter reflects the performance of the security during the part of the quarter it was owned by Brown Advisory, not necessarily the performance of the security itself for the full quarter)
- In Europe, fears over recession, a lack of energy sources as winter approaches and an elongation of the ongoing war in Ukraine continue to pressure Nomad shares. At current prices, Nomad is a compelling value. The company is now covering inflationary costs with strong pricing and only modest elasticity.
- Alphabet is down along with the rest of communication services and digital advertising stocks. It has actually outperformed peers (META, SNAP, PINS) by a material amount. While macro is driving price action in the sector, we believe the stock price is already partially discounting cuts to 2023 estimates and that the company remains the leader in the sector.
- American Tower traded off sharply late in the third quarter alongside the other public tower companies on rising interest rates and the strong USD. There has been no change in the company's fundamental competitive position, as interest rates should eventually create a better M&A environment if private tower companies have difficulty rolling over debt.
- Microsoft continues to see solid demand overall, but there are pockets of consumer- and PC-related demand which have been impacted by the macroeconomic environment. Volatility in these segments can drive near-term fluctuations in profitability, but the long-term strategic relevance of Microsoft to enterprises and consumers continues to only improve.
Bright Horizons cut its earnings outlook for the year due to the ongoing labour shortage that is forcing their centres to run below long-term capacity levels. The COVID-19 impact on labour and enrolment is taking longer than expected to resolve.
Changes to the portfolio throughout the quarterNo changes were made to the portfolio holdings during the quarter.