Brown Advisory Ethical Selection Q3 2019 commentary

Instruments traded
Asset classesUS stocks
Investment styleFundamental analysis focussed on ethical, social and governance (ESG) principles
Quarterly return+2.2% (net of fees)
Annualised volatility (since inception)13%

Market overview

US stock markets were up slightly over the three-month period, although this seemingly placid result masks a sharp sell-off at the end of July, and an equally sharp rise at the beginning of September. 

Portfolio performance

Inception (01.03.2019)

(Performance is net of all fees) 

The Brown Advisory Ethical Selection portfolio performed well in the third quarter — up 2.2% against a 1.2% increase in the Russell 3000 Index (the US market index best used to compare portfolio performance).  This outperformance was driven almost entirely by strong stock selection, which Brown Advisory typically expects to be the dominant driver of performance compared to the market. There has also been a continued benefit from the portfolio’s natural tendency to be underweight to the Energy sector.


Best performing positions

  • Sherwin Williams had a strong EPS report due to very good SSS of 4.2%, despite an unfavourable start to outdoor paint season, and surprisingly good margin expansion despite raw material inflation due to pricing.

  • Alphabet’s core advertising revenue growth accelerated, driving outperformance across the board.  The non-Search business also performed well: namely YouTube, Google Play and the cloud business.  The company disclosed that its cloud business has reached an annual run rate of $8bn, driven by solid demand for its computing and analytics offerings. Brown Advisory also believe Alphabet has multiple paths to enhance value creation including commercialisation of other bets and/or increased disclosure of existing properties.

  • Assurant's lifestyle segment (focused on cellphones, tablets and automobiles) continued to post attractive returns during the quarter.  This, combined with improving returns in their lender-placed segment and ongoing capital share buybacks, has driven continued price appreciation.

  • Zoetis continued to perform well as their best-in-class portfolio of pet and livestock pharmaceuticals drove strong growth.  Recent growth has been aided by new drugs for atopic dermatitis in pets that have seen strong demand and pricing, and excitement over the 2020 launch of Simparica, a treatment for ticks, fleas and heartworm.

  • American Tower posted strong results in its most recent quarter driven by healthy spending from domestic carriers.  Carrier consolidation in India appears to have ended and the company expects positive international net organic growth in 2020.  Over the coming years, Brown Advisory believe American Tower is well positioned to benefit from the transition to 5G which should be accretive to its financial results.

Worst-performing positions

  • Cisco traded off on a weak October quarter guide. China orders were very weak as a result of ongoing trade issues, and enterprise switching orders turned soft at the end of July on enterprise macro worries.

  • Nomad was down primarily due to Brexit fears.  The UK is approximately 25% of Nomad’s revenues.  Fundamentally, Brown Advisory believe Nomad is well prepared to face a possible hard Brexit.  It has been running with higher inventory levels and believes the sector will be able to push through any Brexit-related cost increases (mostly stemming from currency and transport).

  • posted strong revenue growth but missed operating profit expectations.  The company’s investment in one-day Prime shipping negatively impacted operating margins.  On the positive side, AWS and advertising continued to grow at robust rates.

  • UnitedHealth Group posted solid growth and raised guidance but the stock fell on Medicare for All fears. In addition to political uncertainty, investors are also concerned about slower Medicare Advantage growth, weak Medicaid margins and underperformance in commercial.  While political risk will likely persist well into next year, Brown Advisory retain their position in UnitedHealth given the company’s leading technology advantage over its competitors and the strength of the Optum subsidiary.

  • URI stock has been volatile this year, underperforming in Q3 after outperforming in Q1 and Q2.  The declines were driven by weakening expectations in their core non-residential construction end market.  While current construction activity remains strong, uncertainty around trade and the economy in general is causing industry participants to delay approval of new construction projects.

Changes to the portfolio

Brown Advisory advised to sell positions in Conagra Brands and Spectrum Brands to fund a new investment in Nomad Foods. 

Nomad operates as a holding company which manufactures and sells frozen foods: primarily vegetables, fish and chicken. In addition to offering healthy frozen food products, Nomad has established very aggressive goals to source all of its ingredients from sustainable farming practices by 2025.  NOMD has a proven management team that is highly incentivised to re-invigorate the previously under-managed food brands, to the benefit of its shareholders.


At the end of the third quarter, many of the lingering uncertainties that have plagued the market over the past twelve months remain unresolved.  Trade negotiations between the US and China, Brexit and the increased antitrust scrutiny of big tech companies remain top of mind for investors.  More recent events — including an impeachment hearing, rising Middle East tensions and protests in Hong Kong — have clouded the outlook further.  Encouragingly, domestic growth remains steady, albeit relatively low, and the US consumer appears healthy.  Central banks have remained dovish and have provided increased liquidity.  

Brown Advisory are closely watching the markets and the factors impacting recent market unease, but by focusing on the investment process, and staying disciplined with portfolio allocation, are confident for driving continued outperformance.

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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