Brown Advisory Ethical Selection Q1 2023
| Instruments traded | Stocks |
| Asset classes | US Stocks |
| Investment style | Fundamental analysis focussed on ethical, social and governance (ESG) |
| Quarterly return | 5.17% (net of fees) |
Market overview
During the first quarter of 2023, the strategy modestly lagged its benchmark, the Russell 3000 Index. This could largely be attributed to stock selection in the information technology sector, driven by large-cap tech stocks not owned in the Ethical Selection strategy—Nvidia, Tesla and Meta in particular, which are heavily weighted in the benchmark. The combined contribution of just Apple, Microsoft, Nvidia and Tesla was greater than the combined contribution of the other nearly 3,000 constituents in the index. Offsetting this weakness was strength in healthcare stock selection, where the strategy benefited from its relative underweight to large-cap pharmaceuticals; the strategy also benefited from its relative underweight to energy during the quarter.
Driven by an asset-liability mismatch during a period of sharply rising interest rates, a relatively large base of uninsured deposits and a herd mentality among a concentrated group of like-minded depositors, it was shocking to witness the speed at which Silicon Valley Bank and Signature Bank collapsed. While it would appear (for now) that the Fed and the federal government have contained the risk of further contagion associated with this crisis, the aftermath will likely include both tighter banking regulations and tighter lending standards, neither of which are particularly positive for economic activity.
More optimistically during the quarter was the rapid and exciting evolution of generative AI, which is already creating new potential addressable markets across a wide variety of industries. Data-driven companies might stand to benefit from advancements in this technology over the medium and long-term. During the quarter, companies like Nvidia, Microsoft and Alphabet benefited from expanding use-cases for the technology; there may be other beneficiaries from generative AI, although it remains early days.
Portfolio performance (net of fees)
| January | 6.3% |
| February | -2% |
| March | 1% |
| Since inception (March 2019) | 43% |
First Quarter Top Five Contributors to Return - 2023
- Microsoft (MSFT) reported quarterly results that were broadly in-line with expectations, but consistent announcements about Generative AI stemming from Microsoft's OpenAI relationship drove the stock in the quarter. The potential implications are meaningful, and further cement Microsoft's competitive position across their Office and Azure franchises.
- Alphabet (GOOGL) has rounded sharply, following a selloff induced by the announcement of OpenAI/Microsoft's ChatGPT partnership. Since then, the market has become more comfortable with Search market share stability, given the company’s moat around browser usage. At the same time, generative AI costs have already begun to come down (OpenAI's founder suggesting up to a 90% decrease), which has tempered the bear case on margins. The stock remains in value territory, considering it gets a market multiple despite its market dominance and net cash balance sheet.
- Amazon (AMZN), while reporting mixed fourth-quarter results, was a beneficiary of recent rotation into large cap tech stocks.
- First Citizens (FCNCA) shares reacted strongly to news that the bank has assumed a large part of Silicon Valley Bank's asset base. The deal is accretive to both tangible book value and earnings per share.
- Marvell Technology (MRVL) stock began to recover from dismal 2022 performance as a weak January quarter and April guide look like a bottoming, and demand in the key data center end market looks likely to rebound in the back half of the year.
First Quarter Bottom Five Contributors to Return – 2023
- Sherwin-Williams’ (SHW) 2023 guidance called for much lower than expected sales and earnings due to declining housing activity, especially new residential.
- Jack Henry (JKHY) stock fell alongside the broader bank ecosystem in the wake of the Silicon Valley Bank and Signature Bank failures, as investors looked for derivative effects of potential bank stress.
- UnitedHealth (UNH) reported solid fourth-quarter 2022 results and reiterated guidance for the year. However, the company and the broader managed care segment, came under pressure with subsequent updates from the Centers for Medicare & Medicaid Services (a federal agency within the United States Department of Health and Human Services) announcing lower than expected reimbursement rates for Medicare Advantage for the 2024 policy year.
- Bank stocks have seen a meaningful drawdown in the wake of the Silicon Valley Bank and Signature Bank failures – as investors feared further contagion and deposit flight from the bank space. Eastern Bankshares (EBC) stock saw a drawdown alongside the group. The recent turmoil within the bank space will likely lead to further net interest margin pressures and some degree of deposit outflows from banks. This dynamic may be a drag on earnings for most banks, including Eastern. However, the bank environment has stabilised to a large degree in the last couple of weeks – and Eastern should be able to effectively manage the current environment given their granular deposit franchise, strong in-market brand and robust capital and liquidity levels.
- Charles Schwab (SCHW) came under pressure following the failures of Silicon Valley Bank and Signature Bank, as investors attempt to identify other financial institutions potentially at risk of deposit outflows and liquidity shocks.
Changes to the portfolio throughout the quarter
QTD Additions: None
QTD Deletions: None