Equities Fixed Income Hedge Funds Private Equity and Real Estate Sustainable Investing

Equities

We follow a philosophy that low-turnover, concentrated portfolios derived from sound bottom-up fundamental research provide an opportunity for attractive performance results over time. We have a culture and firm equity ownership structure that help us attract and retain professionals who share those beliefs, and we follow a repeatable investment process that helps us stay true to our philosophy.

We construct balanced portfolios for private clients, nonprofits and institutions depending on the needs of the client. We can be 100% open architecture, using third-party managers only, or we can put together a mix of internal and external strategies, whatever is in the client's best interest.

Fixed Income

We follow a philosophy that fixed income strategies built from a foundation of stability coupled with fundamental credit research can seek to generate alpha and control risk. We have a culture and firm equity ownership structure that attract and retain professionals who share those beliefs, and we follow a repeatable investment process that helps us stay true to our philosophy.

We construct balanced portfolios for private clients, nonprofits and institutions depending on the needs of the client. We can be 100% open architecture, using third-party managers only, or we can put together a mix of internal and external strategies, whatever is in the client's best interest. Meet the Investment Solutions Group.

Hedge Funds

Hedge Funds

The Investment Solutions Group is an investment-management team within Brown Advisory that specializes in asset allocation, manager selection, hedge funds and other alternative investment strategies. Dedicated to open-architecture solutions, our team has established a strong track record of identifying high-quality, third-party investment managers across the hedge fund, long-only and private equity universes. We leverage this expertise to help clients assemble portfolios that we believe best fit their needs and goals, offering clients a range of solutions from complete portfolio management to fulfillment of specific hedge-fund and alternative-asset mandates.

Founded in June 2002, the Investment Solutions Group now manages in excess of $3.4 billion for clients (data as of January 31, 2017) in a combination of managed accounts, advisory relationships and fund-of-fund offerings.

Private Equity and Real Estate

Private Equity and Real Estate

Brown Advisory has incorporated private equity and real estate investments in client portfolios since our founding. Today, we can provide that exposure in three distinct ways.

Feeder Funds and Multimanager Funds
We introduce clients to investment opportunities in early- and late-stage venture capital and buyout funds, as well as select real estate funds. We also construct these feeder funds into multimanager funds through our Private Equity Partners (PEP) and Real Estate Partners (REP) vehicles to make private equity investing as easy as possible for our clients.

Customized Private Equity Portfolios
For most clients, private equity is one component of a balanced portfolio that we manage. Other clients, however, come to us specifically for custom-built private equity and real estate portfolios.

For more information on private equity please click here or contact Jacob Hodes at 410-537-5315 or jhodes@brownadvisory.com.

Sustainable Investing

Sustainable Investing Strategies

  • Multi-Manager Strategies
  • For clients seeking an open-architecture solution, we have access to several of the premier sustainable managers in the industry - all vetted by internal research.
  • Private Equity
  • Our private equity team is focused on evaluating the growing universe of private impact investments to identify standout opportunities that target various issues of particular concern to our clients. To date, we have placed assets in investments targeting a variety of impact themes such as community impact, microfinance, education technology, sustainable real estate, water initiatives and others.*
  • *Many alternative investments by regulation may only be sold to Accredited Investors (institutions with at least $5 million in assets) or Qualified Purchasers (institutions with at least $25 million in investments).

Customized Portfolios

This diverse assortment of solutions will meet many clients’ sustainability objectives; however, we understand the continued evolution of this space and seek to be able to react quickly to client needs.

For clients with unique missions, value-aligned investing programs, or who simply wish to ensure that they do not own certain controversial companies or have access to certain industries, we offer the following customized options:

Additional Screening: To the extent we have reliable data and can build rules into our compliance systems, we can add specific screens to a separate account to restrict companies (e.g. oil and gas providers) or industries (e.g. tobacco or weaponry).

Customized and Thematic Portfolios: Within a separate account, we can work together to solve for a sustainability need. From a universe of securities researched from both the bottom-up and for their ESG profile, we can assemble a custom portfolio of securities designed to meet many specific sustainable goals or outcomes.

PULLING THE FANGS APART

The “FANG” companies—Facebook, Amazon, Netflix and Google—have been a dominant investment story in recent years. They have attracted attention as a group—as a success story and, more recently, as a target of skeptics— but these companies have far less in common than the “FANG” acronym and associated media coverage suggest.

When you look at the way investors process fear about the stock market, you can see some patterns over time. One example is their tendency to direct their general market fears toward a specific group of prominent companies that have performed well and that they think are due for a reckoning. In the 1960s, it was the “Nifty Fifty”; in the 1980s, it was oil stocks. Today, we see this happening with the so-called “FANG” stocks—Facebook, Amazon, Netflix and Google (now Alphabet—for consistency we will refer to the company as Google throughout this piece).

We believe that investors may be led astray by looking at the FANG stocks as a monolith that will rise or fall as one. As we discuss in this article, we believe these are highly differentiated businesses with distinct opportunity sets and distinct risks. As we think about whether to own them, we believe the best place to start is bottom-up, fundamental research that helps us understand each one as an individual entity.

False Connections

The acronym “FANG” was coined by CNBC’s Jim Cramer to reference a group of highly successful companies that each leveraged technology to leapfrog ahead in its market or create an entirely new market. All of these companies have generated attractive returns in recent years, and in 2017 in particular. Through Nov. 30, Netflix, Amazon and Facebook were each up more than 50%. Google was the laggard of the group with a “paltry” 31% return during this period.

On the heels of such strong performance, many investors have concerns about a correction. Their fear is bolstered by historical precedent: In the 1960s and 1970s, the “Nifty Fifty” ran up to extremely high valuations, and many performed quite poorly during the 1970s bear market. In the 1980s, a number of highly valued energy companies dominated the S&P 500 Index’s top 10 companies, and these were punished severely in the oil price collapse of 1986.

Investors also tend to naturally focus their valuation fears on big, rapidly growing stocks. When stocks have particularly strong runs due to earnings growth, it is not uncommon to see their multiples expand to what some would consider unreasonable levels. When these stocks begin to look more expensive, investors start to assume they must be expensive, and therefore poised for a fall.

Here’s the problem: This sort of thinking targets stocks indiscriminately. To be effective as a stock picker, however, you have to discriminate scrupulously between individual stocks. A stock’s valuation can stem from all sorts of factors; sometimes the valuation is proven to be justified, other times not. But to fear a stock’s valuation is overblown simply because the company is big or has grown quickly (or even worse, just because it happens to be in the top 10 of the S&P 500 Index) is to walk away from the concept of fundamental research entirely.

In our view, the FANG acronym creates a false connection among a set of companies with very different business models and business drivers. We don’t think about these companies as an amalgam; we seek to understand each business on its own merits and to determine our own view of what each is worth based on our estimate of its future cash flows. Currently, our views on the individual companies in this group vary widely.

Follow the Cash

We own Google and Facebook across a number of our strategies. Google’s dominance of internet search appears unassailable, and it has succeeded in leveraging that dominance into adjacent areas (for example, in video through its YouTube business). Similarly, Facebook has secured its position as the social relationship platform for most internet users in the world. From these perches, the two companies control a duopoly in digital advertising that has led to compelling growth and cash flow generation, and we believe they are in excellent position to sustain that duopoly for the foreseeable future.

Despite Google and Facebook exhibiting meaningfully different absolute growth rates, spending requirements and valuations (as shown in the table on the next page), we believe that both stocks are attractively valued relative to the cash flow they should generate in coming years.

Conversely, we do not own Netflix in any of our strategies (although we have owned it in the past). This choice has been painful of late; we’ve watched its recent upswing from the sidelines. However, if we objectively weigh Netflix’s future upside potential against its downside risk, investing in it simply doesn’t seem justified to us right now. It has grown its subscriber base tremendously, to its credit, but it has done so through ever-increasing spending on original content. As a result, it is burning cash at a potentially harmful rate, and this has led to a downside scenario (in our view) that outweighs its upside. We certainly respect the power of Netflix’s business model— with great content, it can drive subscriber growth, which can fund more great content. But its path to a stable financial profile may be rocky. Today’s market backdrop of increasing multiples has only added fuel to Netflix’s fire. With all this in mind, we agree that this FANG stock may be overvalued. At the right price, it would be more attractive to us, but we don’t believe its current valuation fairly discounts the risks associated with its business model.

We acknowledge some viewpoints shared by a number of “FANG skeptics.” For example, regulatory issues are a growing focus for multiple FANG companies. Facebook is grappling with a variety of privacy and transparency matters; Google faces antitrust challenges related to its ability to promote its own businesses within its search results and on the Android mobile platform; Amazon faces antitrust concerns as it gains market share in various consumer categories. These are meaningful concerns, and we are devoting considerable time and effort to understanding their potential long-term impacts, but we want to reiterate that these are not FANG regulatory risks—they are individual situations, faced by individual companies, that demand individual and separate analysis. For example, the fallout from Facebook’s challenges regarding the integrity of its advertising could spread far beyond the cost of complying with new disclosure requirements. It could lead to an existential threat for the company if large portions of its user base lose confidence in the social platform. We should note, however, that companies with strong free cash flow are often in the best position to address a challenge like this. Simply put, Facebook has the resources to do something about it, and has already put a very large stake in the ground in its most recent earnings announcement when Mark Zuckerberg announced significant spending on these integrity issues. The company cited plans to hire 10,000 new employees in 2018 to monitor content and advertisements.

This is a meaningful risk for Facebook, and we are evaluating its potential impact alongside our view of the company’s response. But the situation is completely unique to Facebook. Companies like Google and Amazon face entirely different primary regulatory risks, and need to be considered separately.

In short, we think any argument for or against “the FANGs” is a dangerous way to think about these companies. Instead, we look at each company’s business model and valuation separately. At the risk of oversimplifying, if the business model and price are compelling, we will own the stock; if not, we won’t. Over time, our stance on each of the FANG companies will undoubtedly evolve, but it won’t be driven by a generalized fear; it will be driven by new information about a specific company, unearthed through research, which leads us to a new conclusion about each company’s upside potential or downside risk.

 

 

The views expressed are those of the author and Brown Advisory as of the date referenced and are subject to change at any time based on market or other conditions. These views are not intended to be and should not be relied upon as investment advice and are not intended to be a forecast of future events or a guarantee of future results. Past performance is not a guarantee of future performance and you may not get back the amount invested.

The information provided in this material is not intended to be and should not be considered to be a recommendation or suggestion to engage in or refrain from a particular course of action or to make or hold a particular investment or pursue a particular investment strategy, including whether or not to buy, sell, or hold any of the securities or asset classes mentioned. It should not be assumed that investments in such securities or asset classes have been or will be profitable. To the extent specific securities are mentioned, they have been selected by the author on an objective basis to illustrate views expressed in the commentary and do not represent all of the securities purchased, sold or recommended for advisory clients. The information contained herein has been prepared from sources believed reliable but is not guaranteed by us as to its timeliness or accuracy, and is not a complete summary or statement of all available data. This piece is intended solely for our clients and prospective clients, is for informational purposes only, and is not individually tailored for or directed to any particular client or prospective client. Private investments mentioned in this article may only be available for qualified purchasers and accredited investors. All charts, economic and market forecasts presented herein are for illustrative purposes only. Note that this data does not represent any Brown Advisory investment offerings.

The S&P 500® Index represents the large-cap segment of the U.S. equity markets and consists of approximately 500 leading companies in leading industries of the U.S. economy. Criteria evaluated include market capitalization, financial viability, liquidity, public float, sector representation and corporate structure. An index constituent must also be considered a U.S. company. Standard & Poor’s, S&P, and S&P 500 are registered trademarks of Standard & Poor’s Financial Services LLC (“S&P”), a subsidiary of S&P Global Inc. One cannot invest directly into an index.



⚑ Equities

Part Two Of The
Balancing Act Series

 

 

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