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.

A STROLL DOWN HINDSIGHT LANE

Market downturns and recessions may seem easy to predict. But timing the market is extremely difficult without the benefit of hindsight.

Ultimately, fundamentals drive stock performance. Over shorter periods of time, this relationship is not very reliable, as stock prices are also affected by a tremendous amount of market noise—announcements from the Fed, political angst or exuberance, fears of war, hope of peace, and a host of other factors. But in the end, a company’s market value is determined by its potential for future growth and profitability.

In the equity strategies that our firm manages, we focus on fundamental research of individual companies to assess their long-term prospects, and we avoid making decisions that require guessing about short-term market movements. When clients ask us about timing the market (for example, about potentially exiting the market to avoid a market correction) there is almost no situation in which we would recommend doing so. As we will discuss in this article, one needs to be highly precise about two market-timing decisions—when to exit, and when to re-enter—in order to truly benefit. In our experience, it is extremely difficult, if not impossible, to do so effectively.

Even if investors discard the notion of broadly timing the market, they still may have questions about staying invested in actively managed strategies during what they perceive as a risky market. Are there any signals amidst the noise that can offer them comfort? Well, we believe that broader economic fundamentals are important for long-term stock valuations. These fundamentals determine the overall environment in which corporations operate. While one can’t predict a recession with any more accuracy than a market correction, we have learned two things from the last 50 years of market history: Market corrections were mild unless they coincided with a recession; and, active managers generated meaningful alpha during recessionary periods. These facts suggest that if the economy and markets do turn sour and we experience a major market correction, actively managed strategies may in fact weather the storm better than indexes if they focus on robust, healthy businesses.

The Folly of Market Timing

At the risk of stating the obvious, it would be great if we could time market corrections! Get out of the market when it peaks, get back in when it bottoms out, preserve your capital—that is an ideal scenario. The problem is that it is impossible to time market corrections effectively, at least in our experience.

We think about the market and individual stocks in shades of gray, not in black and white. We develop a likely range of upside and downside scenarios over a period of years, and try to make decisions that position us relatively well across all of those scenarios. However, trying to avoid a market correction is a very different exercise. It involves two very distinct and momentous decisions—when do you exit, and when do you re-enter? According to history, you are unlikely to get much benefit from a market-timing attempt unless you are highly accurate about both of those decisions. 

We looked at all of the market corrections in the S&P 500 Index from 1968 to the present, and calculated how well an investor would have fared by exiting the market at various points before and after the market’s peaks, and then re-entering the market at various points before and after its troughs. We found that unless investors timed it perfectly on both ends—or at minimum, timed at least one of the decisions perfectly—in most cases they would still bear the brunt of the losses from the downturn. Just being three months off for each decision meant that investors on average would have experienced 90% or more of the average downturn (see chart "A Stroll Down Hindsight Lane" below), and in many cases would have missed out on positive returns.

If you see this data as a challenge to simply “do better” at market timing, be forewarned: The broad investing herd and noted financial experts have repeatedly tried—and repeatedly failed—to time the market. The chart below also shows how the investing public has invariably entered and exited the market at the worst possible times (as measured by monthly net equity mutual fund flows); additionally, otherwise brilliant economists and market experts often put a stake in the ground regarding the market’s future path, only to be proven sorely mistaken. Finally, note that taxes and transaction costs are additional hurdles that market timers must overcome.

If you are tempted to try and time the market, be forewarned: Both the public and noted financial experts have repeatedly tried—and repeatedly failed.

One reason market timing is so hard: You have to be really accurate for it to pay off.

It's the Economy

In short, precise market timing is impossible, in our view. However, we still want to be attuned to information that can help us understand the probability of a downturn. Additionally, we are always looking for data that may offer clues about the potential length and severity of the next downturn.

One factor that seems to be quite relevant is the health of the economy when a downturn occurs. Specifically, we know from history that downturns tend to be longer and more severe if they occur during an economic recession, and milder and shorter in the absence of a recession. This is obviously relevant when we consider our clients’ overall exposure to risk assets, and it is also important for our equity research analysts and portfolio managers as they think about the prospects of the individual stocks in their portfolios.

The table below offers a glimpse of each of the notable S&P 500 Index downturns from 1968 to the present. Downturns that overlapped recessions are highlighted in yellow.

Since 1968, downturns in the equity market that did not coincide with recessions were generally short and
shallow. Downturns during recessions (highlighted in yellow below) were generally longer and more severe.

The average downturn during recessionary periods lasted 17 months, resulted in a 38% drop in market value, and required a 34-month period before the Index recovered to its prior peak. The average downturn in non-recessionary periods lasted only five months, resulted in a 16% drop in value, and required only six months of recovery time before the Index bounced back. Recessions appear to play a notable role in both the length and severity of downturns.

As we mentioned earlier, we don’t believe that it’s any easier to predict a recession than it is to predict a market correction, and we don’t build plans or base decisions on predictions about either. But there has been an undeniable relationship between recessions and the severity of downturns over time, so we can at least use that knowledge as a filter to assess the potential significance of incoming data that might affect the economy.

The Value of Active Management

Actively managed equity funds generated
meaningful value during recessionary periods in
the latter half of the 20th century.​As we proceed further in this series, we will move into discussions that focus more on individual stock selection, and on the value that active management can produce for investors—particularly during periods when the stock market or the economy is potentially poised for a reversal. To close this article, we offer some introductory evidence to support the notion that managers tend to earn their stripes during periods of economic weakness.

The table at right summarizes the results of a 2011 study by Robert Kosowski, who found that managers indeed tended to struggle during economic expansions but produced meaningful value during recessionary periods.

This data makes sense intuitively. During periods when the economy is strong and the market is running, people tend to be more confident and more willing to speculate on riskier companies.

Additionally, the ongoing popularization of passive investing may be contributing to a lack of selectivity in markets. Index funds essentially ignore the intrinsic value or current price of any given stock, and as capital shifts to index funds, those funds may provide support for all stocks.

But when the economy weakens, when broad-market confidence fades—that is when we believe it is most important to be selective about the companies we choose to own. As we said at the start of this article, fundamentals ultimately drive stock performance. In the absence of other exogenous factors to buoy a company’s stock price, the only thing left is that company’s foundation—the health of its balance sheet, the strength of its business model, and its ability to generate earnings and cash flow.

 

 

 

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.



⚑ Equities

Part One Of The
Balancing Act Series

 

 

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