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


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.


Shifting Gears

Ahead of the first tightening by the Federal Reserve in nine years, we are shifting into less-traditional assets, anticipating that, at best, U.S. stocks and fixed income securities will probably languish when the central bank begins to withdraw record stimulus.

Federal Reserve policymakers forecast that they will likely start tightening this year for the first time since 2006, bringing an end to record liquidity, even as central banks from Europe to Japan push unprecedented stimulus. In anticipation of the policy switch, we have reallocated across a wide range of asset classes in an effort to limit risks and seize new opportunities.

In many clients’ portfolios we have eliminated our overweight position in U.S. stocks after trimming exposure to U.S. equities and fixed income securities during the past several months. Instead, we favor hedged equity strategies, income-oriented real estate and other investments that we believe pose a risk level between stocks and bonds.


Without a Script

No central bank has ever wound down such massive stimulus, so the potential impact on the economy and financial markets is not clear. The Fed has held the benchmark federal funds rate at zero—a record low—since December 2008 and further reduced borrowing costs through so-called quantitative easing, a bond-purchase program that more than quadrupled its balance sheet to $4.5 trillion. The easing helped stabilize financial markets, reduced the risk of deflation and resuscitated the economy and job growth. Unemployment fell to 5.4% in April, the lowest level since May 2008 and just above the range of what policymakers consider full employment. Consequently, the central bank has signaled that it will begin pushing up interest rates if the economy continues to improve.

Fed Chairwoman Janet Yellen in recent months has repeatedly said the pace of tightening would probably be slow so as not to inhibit growth. The economic expansion is weak and inflation is still below the central bank’s 2% target. Also, the Fed long ago learned the high cost of premature tightening. After the 1929 stock market crash and banking crisis, the economy by the mid-1930s appeared to be rebounding. The Fed dramatically tightened policy in 1937, prompting a sharp relapse that prolonged the Great Depression.

By raising interest rates, the Fed would alter the landscape across the equity and fixed income markets. Investors seem fixated on the timing of the first increase. We believe it is more important to consider how the entire tightening cycle will play out. We foresee three scenarios, from what we view as most to least likely:

1. The Fed, basically correct in its assessment of the economy, raises interest rates gradually. Changes in monetary policy do not cause a recession and contain inflationary pressures.

Impact on U.S. equity market: With the economy stable, the investor mood remains sanguine.

Impact on U.S. bond market: Rate increases, while posing a slight negative to bond prices, are mild enough that intermediate-duration should produce positive returns over the medium term.

2. The economy and inflation prove stronger than the Fed expects, prompting an aggressive central bank response to contain inflation. Impact on U.S. equity market: A comparatively quick interest rate increase counteracts the benefit from stronger economic growth, impairing profitability and valuations.

Impact on U.S. bond market: Interest rates rising faster than market expectations prompt substantive bond market losses. Still, most intermediateterm fixed income strategies do not suffer major losses.

3. The economy and inflation are weaker than anticipated and the Fed, as in 1937, raises interest rates too soon. Rising rates cause economic growth to slow, prompting the Fed to either halt tightening or reverse course. Impact on U.S. equity market: The weakening economy erodes revenues and profitability, while decreasing confidence in the Fed. Concern about future economic growth undermines valuations.

Effect on U.S. bond market: Investors seeking a safe haven buy bonds, pushing down U.S. interest rates toward the yields of other developed economies.

Elusive Goal

Congress mandated the Federal Reserve to promote price stability and full employment. While the jobless rate fell in April to 5.4%, the lowest level since May 2008, inflation has persisted well below the Fed’s target of 2%.



Shifting Opportunities

The scenario analysis underscores that, on balance, Fed policy changes will not be especially positive for equities and fixed income in the U.S. Even under scenario No. 1—the best case for U.S. stocks—equities would probably not keep pace with the returns we have seen during the past five years. For U.S. fixed income, the two most likely scenarios would result in returns similar to or below the market’s yield of 2.1%, as of April 30. As a result, we have incrementally moved assets out of traditional U.S. equities and U.S. fixed income.

We overweighted U.S. equities in many client portfolios for the past four years. That has worked well. In that period, the S&P 500 annually rose 13.6% compared with 2.9% for the MSCI All-Country World Index ex-U.S. But today, U.S. equity valuations exceed the historical average and the strong dollar poses headwinds to corporate profitability. This argues for shifting assets away from U.S. stocks.

The specific targets for our reallocation—real estate, hedged equity strategies and international equity markets—offer lower correlation to the U.S. stock market. In real estate, we are particularly attracted to incomeproducing properties outside of the “gateway” markets of New York, San Francisco and Miami. These more overlooked properties offer better valuations compared with public REITs and the trophy properties of the gateway cities. Finally, real estate’s smaller scale has advantages in diversification. The outlook for a shopping center or apartment complex outside the gateway areas hinges much more on sound management and the health of the local economy than on trends in the global economy or stock markets.

When appropriate, we have stepped up investment in hedged equity strategies, in which managers can isolate the positive and negative qualities of a company from its correlation to the broad stock market. Managers have the flexibility to play both sides of a company’s shares, taking a long position when they expect a stock will rise and shorting it on expectations it will decline. This approach is especially attractive in a flat or declining market— manager skill matters more than the index returns.

Finally, we are emphasizing international equities, especially in Asia’s emerging markets. The region is one of the largest beneficiaries of lower oil prices, with China, Japan, India and South Korea among the top five importers of oil. Cheaper oil prices have reduced inflationary pressures, clearing the way for central banks in the region to cut interest rates. Finally, Asia’s leading economic indicators are showing signs of life, and its stock market valuations are cheaper than the markets of developed countries, as depicted in the chart above.

While posing manageable risk, these opportunities should buffer our client portfolios against the uncertainties from the coming historic change in Fed policy, record-low interest rates and rising valuations in U.S. stocks. Our shifts also offer the prospect of solid gains in their own right—something all investors would cheer.

Asia’s Allure

After years of underperforming, stock markets in Asia offer more attractive valuations than their counterparts in Europe and the U.S. The price-to-sales ratio of Asia’s equities is especially low on a comparative basis.

SOURCE: Bloomberg


By Taylor Graff, CFA, Asset Allocation Analyst

Please download The Advisory to read other articles in this issue including:

Buffering Against Volatility
By Tom Graff, CFA, Head of Fixed Income

Fixed Income: Bonds help portfolios despite Fed policy shifts

Expanding Horizons
By Mick Dillon, Portfolio Manager, Global Leaders Strategy

Portfolio Strategy: Culling 4,000 stocks worldwide to find global leaders

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. 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. Terms and definitions: MSCI All-Country World Index ex-U.S. is a market-capitalization-weighted index maintained by Morgan Stanley Capital International (MSCI) and designed to provide a broad measure of stock performance throughout the world, with the exception of U.S.-based companies. The MSCI All Country World Index Ex-U.S. includes both developed and emerging markets. The Russell 1000® Index measures the performance of the large-cap segment of the U.S. equity universe. It is a subset of the Russell 3000® Index and includes approximately 1000 of the largest securities based on a combination of their market cap and current index membership. The Russell 1000 represents approximately 92% of the U.S. market. The Russell 1000 Index is constructed to provide a comprehensive and unbiased barometer for the large-cap segment and is completely reconstituted annually to ensure new and growing equities are reflected. The index is a trademark/service mark of the Frank Russell Company. Russell® is a trademark of the Frank Russell Company. The MSCI Europe Index is a free float-adjusted market capitalization weighted index that is designed to measure the equity market performance of the developed markets in Europe. The MSCI Europe Index consists of the following 15 developed market country indexes: Austria, Belgium, Denmark, Finland, France, Germany, Ireland, Italy, the Netherlands, Norway, Portugal, Spain, Sweden, Switzerland, and the United Kingdom. The U.S. Consumer Price Index (CPI) is a measure of the average change over time in the prices paid by urban U.S. consumers for a market basket of consumer goods and services. One cannot invest directly in an index. The MSCI Emerging Markets (EM) Asia Index captures large and mid cap representation across 8 Emerging Markets countries. With 537 constituents, the index covers approximately 85% of the free float-adjusted market capitalization in each country. Barclays Aggregate Bond Index is an unmanaged, market-value weighted index comprised of taxable U.S. investment grade, fixed rate bond market securities, including government, government agency, corporate, asset-backed, and mortgage-backed securities between one and ten years. The Russell Global Large Cap Index offers investors access to the large-cap segment of the entire global equity universe. The Russell Global Large Cap index is constructed to provide a comprehensive and unbiased barometer for the large-cap segment and is completely reconstituted annually to accurately reflect the changes in the market over time. One cannot invest directly in an index.

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