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 [email protected].

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.

DEFENSE INDUSTRY STOCKS GAIN AMID RISING GLOBAL TENSION

Geopolitical instability and the end to nearly a decade of budget austerity have improved the prospect for defense industry stocks.

Forget the Machiavellian notion that the best defense is a strong offense. Amid persistent instability in geopolitics and global finance, an investor in equities can both limit risk and find opportunity with a targeted stake in the defense industry.

An investment in defense contractors—which tend to perform independently of economic growth—provides diversification that could help buffer a portfolio against setbacks from a slowing global expansion. Demand in the sector is robust, with several governments boosting defense spending in response to terrorism, tension or outright conflict in East Asia, the Middle East and Ukraine, and the increasing sophistication of weapons produced by Russia and China.

“Western military technological superiority, a core assumption of the past two decades, is eroding,” according to John Chipman, chief executive of the International Institute for Strategic Studies (IISS). Most notably, Russia and China are challenging Western democracies with advances in ballistic and cruise missiles, combat aircraft, air defense systems and armored vehicles, according to London-based IISS, a think tank focused on global security and military conflict.

To be sure, some investors may not want to own defense companies and the industry is not without risks. Although stock prices for arms makers tend to rise during an election year as candidates talk up national security, such jawboning does not prevent post-election cutbacks in defense in response to public pressure for austerity. Low oil prices may also inhibit demand from some of the world’s biggest F arms importers such as Saudi Arabia. Moreover, low correlation with the economy means that defense industry stocks would probably lag other industries during a boom. In our view, though, these risks will not meaningfully halt the industry’s tailwinds:

Regional tensions. China, North Korea, Russia and Iran show no signs of scaling back ambitions to build their regional clout. Despite a recession, Russia expanded defense spending last year at a faster rate than any other major military power. Its $65.6 billion budget for 2015 equaled roughly 5% of gross domestic product, according to IISS. From 2009 until 2015, China annually boosted its defense budget by $10 billion to $15 billion, spending $146 billion last year.

Rearming democracies. In response, the U.S., Europe and major weapons importers, including India, Japan and South Korea, are stepping up spending. For fiscal year 2016, the U.S. increased its defense budget for the first time in eight years. The Pentagon, which accounts for more than 80% of arms makers’ revenue, plans to boost its discretionary budget authority by 4.4% to $585.2 billion in fiscal year 2021, from $560.4 billion in fiscal year 2015. Many European countries have restored military outlays on a growth trajectory, while Japan and South Korea have announced plans to buy several squadrons of F-35 jet fighters.

“I can’t think of a time when our international pipeline of opportunities was more robust than it is today,” according to Tom Kennedy, CEO of Raytheon, maker of torpedoes, laser-guided bombs and the Patriot missile defense system. International sales during the second quarter surged 8%, Kennedy said in a July 28 conference call with analysts.

Steady spending. Growth in defense spending is comparatively transparent and predictable—in the U.S., post-World War II cycles have lasted as long as nine years. The Pentagon also breaks down its budget into line items, enabling multiyear projections of revenue growth for companies focused on specific weapons programs.

Shares in the defense industry offer an opportunity for portfolio diversification, with the Pentagon’s budget and U.S. industrial production moving independently during the past 35 years.

Arms makers on average offer a 1.75% dividend and free cash flow yield of 6.5%, which exceeds the amount for most other industrial companies, including the free cash flow yield of 5% at 3M and 5.2% at Danaher. Among major defense contractors, General Dynamics leads the pack with a dividend yield of 2% and a free cash flow yield of 7% for fiscal year 2017.

General Dynamics is benefiting from stepped up funding for the construction of U.S. destroyers and Virginia-class nuclear-powered attack submarines. It is also developing a replacement for Ohioclass ballistic missile submarines, which were first commissioned in 1981. An order backlog totaling 19,000 for the company’s combat vehicles—including the eight-wheel Stryker and the Abrams battle tank—is equivalent to 3.4 times annual production as of December.

General Dynamics sells at a price-to-earnings ratio of 15, which is meaningfully lower than the average of its rivals focused only on defense: 18. The discount stems largely from investor pessimism over the company’s Gulfstream jet business. Orders for business jets from corporations and affluent individuals have declined in recent years, largely because of weakness in emerging markets, especially Russia and China, where demand had been strong. Orders waned partly because of an anti-corruption campaign in China and financial sanctions against individuals allegedly backing efforts to destabilize Ukraine.

We believe the decline in demand for the company’s large-cabin business jets—widely deemed to be the top in the industry—will probably be shorter than most investors anticipate. Indeed, we are hoping that shares of General Dynamics will rise as the company rolls out two new models of high-end jets and continues to gain market share. A two-year backlog for the Gulfstream G-650, the company’s flagship aircraft, also mitigates some of the downside risk.

In a time of persistent geopolitical tensions, we believe that defense industry stocks offer the prospect for meaningful gains and a countercyclical buffer against weakening global economic growth.

 

 

 

The views expressed are those of the authors 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 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. In addition, these views may not be relied upon as investment advice. The information provided in this material should not be considered a recommendation to buy or sell any of the securities mentioned. It should not be assumed that investments in such securities 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 or other 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 and is for informational purposes only. No responsibility can be taken for any loss arising from action taken or refrained from on the basis of this publication.

This communication and any accompanying documents are confidential and privileged. They are intended for the sole use of the addressee. Any accounting, business or tax advice contained in this communication, including attachments and enclosures, is not intended as a thorough, indepth analysis of specific issues, nor a substitute for a formal opinion, nor is it sufficient to avoid tax-related penalties.



⚑ Equities/Defense Industry

This article appears in the September 2016 issue of The Advisory. Other articles in this issue include:

 

Investors Facing Rising Risks Need Solid Defense, Savvy Offense
Increasing political and economic risk during the past year has widened the range of possible positive and negative scenarios for financial markets. Consequently, investors need to build a solid defensive position while seizing opportunities that arise amid the instability.
By Taylor Graff, Head of Asset Allocation Research and Ed Chadwyck-Healey, Head of International Private Clients
⚑ Investment Outlook

Falling Interest Rates Trigger Investor Hunger For Yield
Investors snapping up U.S. securities are seeking yield as much as safety as interest rates plunge toward record lows.

By Tom Graff, CFA, Head of Fixed income and Lyn White, CFA, Credit Analyst
⚑ Fixed Income

Private Credit Outshines Many High-Valuation Stocks, Bonds
Private credit occupies a sweet spot on the investment landscape, offering earlier distributions than private equity and higher yields than most publicly traded securities.

By Meera Patel, CFA, Director of Private Equity Fund Research and Jane Korhonen, CFA, Portfolio Manager
⚑ Alternative Investments

Proposed Tax Law Changes Prompt Estate Planning Review
Multi-generational planning, while best executed in prudent steps over long periods, sometimes requires a review because of changes in regulation or financial markets. Such is the case today amid consideration of changes to U.S. tax law.

By Edward Dunn, Strategic Advisor and Morgan Folus, Strategic Advisory Analyst
⚑ Strategic Advisory

 

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