Brown Advisory Ethical Selection USD Q4 2020 commentary

SaxoSelect Commentaries
Saxo Bank

Asset classesUS stocks
Instruments tradedStocks
Investment styleFundamental analysis focussed on ethical, social and governance (ESG)
Quarterly return12.7% (net of fees)
Annualised volatility (since inception)25% 

Market overview

Despite the pandemic’s most recent surge, in Q4 2020 the market responded positively to encouraging vaccine announcements and monetary stimulus. Strong earnings announcements from numerous companies in technology, health care and consumer discretionary also bolstered the market’s optimism.  As investors look forward into 2021, positive sentiment has propelled “value” and small-cap stocks to new highs.

For market participants, 2020 has been an unprecedented year.  The pace of change has accelerated across many industries making the future even more difficult to predict.  The investment management team at Brown Advisory does not attempt to make broad market predictions, nor does the team manages portfolios from the top down.  Rather, the team focuses on conducting thorough fundamental and sustainable research, driving strong communication within the investment team, and managing the portfolio with a long-term investment horizon.  Amidst the market’s turmoil, the team remains guided by individual company analysis and portfolios built from the bottom-up.  

Turning to the quarter’s results, strong performance within communication services and financials were offset by minor relative weakness among most other sub-segments. Within communication services, Disney was a notable outlier: the company reported stellar growth in the number of subscribers for its Disney Plus streaming service on the one-year anniversary of its launch. The announcements about the COVID-19 vaccines also improved the outlook for theme park attendance positively impacting the share price. Strength within financials was broad-based: investors had been concerned about the amount of loans on deferral on bank balance sheets, but the news of a COVID-19 vaccine eased fears that these deferrals would translate into non-performing assets. The banking sector as a whole had a big rally as a result. Offsetting this strength was minor underperformance in a few other sub-sectors; notably, the underweight to energy was a detractor given the bid the subsector saw in Q4. In contrast, the underweight to energy proved a positive contributor to performance for the full-year. Performance for the strategy for the full-year was fairly broad-based, with offsets mostly related to names that were particularly impacted by COVID-19 due to business model exposure rather than fundamental concerns (i.e. physical retail exposure). 

Portfolio performance (net of fees)

Oct
-2.0%
Nov
10.1%
Dec4.4% 
2020
 20.9%
Since Inception (March 2019)
44%

The Brown Advisory Ethical Selection portfolio leverages the power of Brown Advisory proprietary fundamental and environmental, social and governance research in an effort to pursue strong investment returns that align with investors’ values. The twin focus of the investment management team’s (the “team”) portfolio construction process is to, invest in companies that the team believes have favorable ESG profiles, and to isolate stock selection as a key driver of performance relative to the market. 

The team seeks to accomplish this by combining deep fundamental business analysis and investment judgment with objective portfolio analysis. The result is a portfolio that seeks outperformance relative to a broad market benchmark, while investing within the confines of an ESG investment universe.

The strategy gained 12.7% the fourth quarter which was a little behind the return for the benchmark Russell 3000® Net Index of 14.7%. For calendar year 2020, both the portfolio and the benchmark returned 20.9%. 

Top 10 portfolio holdings (as of 31/12/2020)

42.7% of total portfolio

Top 10 equity positions% of portfolio
KKR & Co. Inc. Class A5.7
Amazon.com, Inc.5.1
Alphabet Inc. Class A4.9
Marvell Technology Group Ltd.4.3
Walt Disney Company4.2
Visa Inc. Class A4.2
Sherwin-Williams Company3.9
Canadian National Railway Company3.5
Zoetis, Inc. Class A3.5
Nomad Foods Ltd.3.4

Best performing positions

  • Walt Disney Company was the top contributor to performance for the fourth quarter, posting a total return of 46.0%.  The company reported stellar growth in the number of subscribers for its Disney Plus streaming service on the one-year anniversary of its launch. In addition, the announcements about the COVID-19 vaccines improved the outlook for theme park attendance positively impacting the share price.
  • Charles Schwab was the second-best contributor posting a total return of 46.9% in the last three months of the year. Continued strength in equity markets, rising interest rates and increased optimism for the TD Ameritrade deal drove Charles Schwab stock higher in the quarter.
  • Alphabet Inc. grew revenues 15% in the third quarter as advertising spending increased and online digital growth benefitted all business segments (Search, YouTube, Cloud and Play). The company controlled expenses thereby demonstrating operating margin leverage. Investors shrugged off antitrust concerns bidding up shares of Alphabet 20.1% as the underlying business model remains strong.

Worst performing positions

  • American Tower posted strong results, but the stock was weak posting a decline of 6.7% as investors anticipate slower growth in 2021.  Investors expect multiple factors to negatively impact near term growth including T-Mobile’s tower decommissioning, regulatory uncertainty in India and slower growth from AT&T’s FirstNet deployment.  Despite these challenges, American Tower’s business model continues to command high visibility and growth potential.
  • Nomad’s share price was essentially flat for the quarter (-0.2%). The company continues to be well run and growing through market share gains and innovation.
  • Jack Henry’s shares were also flat (-0.1%) in the quarter as the pandemic caused implementation delays in their core business, and delays in a payments platform migration that investors were hoping would be finished in calendar 2020. 

Changes to the portfolio 

  • Vontier was a very small position that was spun out of Fortive and subsequently it was sold from the portfolio.

Outlook 

In conclusion, the team was pleased with the performance of the portfolio in a very challenging market, and continues to believe in its process, which has driven outperformance over the long run. The team believes that rigorous bottom-up security analysis, ESG alignment of the investments and thoughtful portfolio construction should lead to meaningful outperformance in the long run. 

Disclaimer

Any information found in this document, including performance information and statistics are subject to change. You can find the latest updated pricing information on the description page for each available portfolio. In providing this material Saxo Bank has not taken into account any particular recipient’s investment objectives, special investment goals, financial situation, and specific needs and demands and nothing herein is intended as a recommendation for any recipient to invest or divest in a particular manner and Saxo Bank assumes no liability for any recipient sustaining a loss from trading in accordance with a perceived recommendation. All investments entail a risk and may result in both profits and losses, and all capital is at risk. In particular investments in leveraged products, such as but not limited to foreign exchange, derivatives and commodities can be very speculative and profits and losses may fluctuate both violently and rapidly. Speculative trading is not suitable for all investors and all recipients should carefully consider their financial situation and consult financial advisors in order to understand the risks involved and ensure the suitability of their situation prior to making any investment, divestment or entering into any transaction. Any mentioning herein, if any, of any risk may not be, and should not be considered to be, neither a comprehensive disclosure of risks nor a comprehensive description of such risks. Any expression of opinion may not reflect the opinion of Saxo Bank and all expressions of opinion are subject to change without notice (neither prior nor subsequent).

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