MARCH 2024
A Focus on Steady Growing Businesses: The Brown US Sustainable Growth Fund
The fund was added to the BUY list in 2017 shortly after it became available to UK and European investors (the US based fund manager had been running this strategy since 2011). Initially, it was recommended only for clients following a sustainable mandate, given the fund’s focus on investing in businesses with better Environmental, Social and Governance (ESG) characteristics than their peers. However, as the conviction in the strategy grew, it quickly became a widely-held US equity holding across all types of clients. With its focus on steady growing businesses, it has delivered excellent returns for all our mandates.
The management team invest in a portfolio of between 30-40 US equities, which is at the more concentrated end of funds you will see on our BUY list. This is driven by a view that only a few businesses can be deemed to have exceptional growth prospects at any one time. It also means the fund’s managers seek to know more about the companies in which they invest than their peers; this approach is aided by an experienced portfolio management team, supported by a team of 50 analysts.
Source: Brown Advisory
The key focus of the fund management team is their work on Sustainable Business Advantage. This differentiates it from competitors who also seek to invest in growing US companies. The core ethos of this work is not just determining companies that have good policies and management of ESG issues, but identifying those where their main drivers of revenues and profits are because of these characteristics.
Source: Brown Advisory
A good example of this would be Cadence Design Systems. This firm produces machines used by semiconductor and systems companies to optimise the energy and materials used to make electronic products. Using less power and materials to create electronic products is a key issue when it comes to mitigating climate change risk and making more out of less; Cadence is a market leader in this technology. However, it is not just better for the environment to use less power and materials but also better for their cost base as they need to spend less to make more. Cadence is therefore performing very well because of its market leading environmental characteristics.
The investment process of the team and their choice of investments has resulted in the fund being one of the top performers within its North American equity peer group of funds. It has also meant they have significantly outperformed the passive index represented by the S&P 500. This does not mean the fund has not had challenging years. In 2022, when US companies had been growing quickly and when their share prices were looking expensive, the fund generally underperformed the market and their non-US listed counterparts abroad. On the face of it, this performance may seem concerning. However, given the investment universe of the fund, this situation was entirely expected given the prevailing environment of high inflation and rising interest rates.
We can also see that the fund has generated this performance with marginally lower volatility than other funds investing in a similar way. This means that, on average, the value of £1000 invested in the fund has fluctuated less per year than its peers. This is demonstrated above where the top left quadrant of the chart is the most desirable place to be as it signifies more return and less risk than the average fund.
With strong ESG credentials and an excellent performance record, this fund merits its place in portfolios as a long-term holding for clients seeking capital growth.
This commentary was prepared by Louis Tambe.
As a Head of MPS, Louis is responsible for the running of the Managed Portfolio Service as well as investment research, fund selection and asset allocation used across the investment services CAM offer. He is motivated by the opportunity to protect and grow the hard-earned capital of City Asset Management’s clients and has recently been a key part in designing CAM’s sustainable investing service. Before joining CAM, Louis was a Fund Analyst at FE Investments where he covered equity and alternative strategies and he has Chartered Financial Analyst (CFA) and Chartered Alternative Investment Analyst (CAIA) status. Louis has a keen interest in sport, regularly playing hockey and tennis in his spare time. He also enjoys travelling and learning about different cultures and is currently learning Spanish.