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.

THE ADVISORY | RUDE AWAKENING

As recently as 2012 Puerto Rico was able to sell to investors public-sector bonds despite its bleak fiscal outlook and shrinking economy. The commonwealth’s default last month on a portion of $72 billion in troubled debt spotlights not just an ill-advised investment, but a pitfall in the municipal bond market.

Consider this scenario: An economy is shrinking, government debt is ballooning and emigration is eroding the workforce. Yet creditors shrug off signs of decline and cling to public-sector bonds yielding as much as 15%—until the government abruptly drops the pretense of fiscal solidity and labels the debt unpayable.

That in brief is the story of Puerto Rico’s rude awakening for investors. The June announcement by Governor Alejandro Garcia Padilla that the commonwealth could not repay $72 billion in debt left some of the world’s most established hedge funds and mutual funds holding near-worthless paper. Bonds sold by Puerto Rico’s Public Finance Corp. plunged in August to 9 cents on the dollar.

Investors had snapped up Puerto Rican debt because of high yields and exemption from federal, state and local taxes in the U.S. Many hedge funds and municipal bond mutual funds persisted with purchases even as credit-rating firms downgraded the bonds far below investment grade.

The investors’ losses spotlight a pitfall in the $3.6 trillion municipal bond market and the imperative for bottom-up research when selecting public-sector debt. While the budget outlook for U.S. cities and states has dramatically improved since the Great Recession, pockets of fiscal dysfunction persist. Some bonds, because of their structure, make investors especially vulnerable to the whims of state and local officials.

Not Appropriate

For example, so-called appropriation bonds such as some sold by Puerto Rico are repaid only if government officials approve payments as part of annual budgetary planning. The prospectus for appropriation bonds issued by the Public Finance Corp. states that lawmakers do not have a legal obligation to appropriate money to pay creditors, a structure much riskier than revenue-backed bonds that are safe from the whims of lawmakers.

 

Troubled Debt

The prices of many municipal bonds have slumped this year, with Puerto Rico’s appropriation bonds hit especially hard by the government’s decision not to make payments on a portion of public-sector debt.

 

Such debt is also common on the U.S. mainland. Just days after Puerto Rico defaulted, Illinois failed to appropriate money to pay off bonds issued by Chicago’s Metropolitan Pier and Exposition Authority. Standard & Poor’s cut the rating on the debt to nearjunk from AAA, the highest rating.

New Jersey is one of the largest issuers of appropriation debt. The Garden State has sold roughly $30 billion in such debt to fund projects ranging from education to transportation. Even without a downgrade, the debt has sunk 8% this year compared with a price decline of 1.6% for the broad municipal bond market. (Please see chart on page 4.) The New Jersey debt is trading at levels close to junk bonds because of heightened investor concern about political risk.

Too Risky

Puerto Rico highlights how some investors have taken on excessive risk by chasing yield, given record-low interest rates. The Federal Reserve, since pushing down the main interest rate to zero in 2008, has repeatedly acknowledged that a “reach for yield” may threaten financial stability. Fed Vice Chairman Stanley Fischer said in June that the central bank is carefully monitoring whether investors “take on risks they cannot measure or manage.”

In Puerto Rico, investors turned a blind eye to fundamental risks well beyond their vulnerability to fiscal retrenchment. The island’s economy has shrunk for nearly a decade and will probably contract by more than 1% during fiscal year 2015, according to a June report commissioned by Puerto Rico and co-written by Anne Krueger, a former first deputy managing director of the International Monetary Fund.

Only 40% of the adult population is employed or looking for work, compared with 63% on the U.S. mainland. Moreover, emigration has reduced the population to about 3.5 million from about 3.8 million in 2006, inhibiting demand and economic growth, according to the Krueger report.

The island’s fiscal health has also slid steadily. Public-sector debt has expanded every year since 2000, hitting 100% of gross national product at the end of fiscal year 2014. Meanwhile, tax revenues have declined to about 12% of GNP from more than 15% before 2006, the Krueger report said.

Investors also disregarded how Puerto Rico’s status as a commonwealth would make debt restructuring especially challenging. The island is neither a state nor a sovereign nation, so the process for trimming its liabilities is not clear. Puerto Rico’s leaders will have to negotiate with creditors without protection under Chapter 9 of the U.S. Bankruptcy Code.

Wishful Thinking

Some investors in Puerto Rico’s bonds are hoping for a bailout from Washington. But with Congress facing its own fiscal challenges and a national election scheduled for November 2016, betting on a lawmaker rescue does not appear to be an especially promising investment.

The hazards of appropriation bonds underscore the value of a bottom-up approach to building a municipal bond portfolio. The securities should have diversified and specific streams of revenue and solid legal protections that give creditors senior status in the event of default. Bonds issued by cities and states spanning a broad geographical range further reduce risk. Following such an approach, we do not hold appropriation bonds sold by Puerto Rico and Chicago.

Among our holdings in sectors backed by clear flows of revenues, we maintain an overweight in health care and transportation and remain focused on credit stability, valuations and opportunities for price gains. We believe that bonds tied to revenues from toll roads and airports should outperform with the economy strengthening and oil prices low.

Even with the turbulence in Puerto Rico and Chicago, the fundamentals of municipal credit in general are improving. An investor, though, needs to make sure the revenue that backs a bond is not vulnerable to a cutoff by fickle lawmakers.

 

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

Shadow Consumption
By Paul Chew, CFA, Head of Investments

Economic recoveries usually feature a surge in consumption as employment and wages rebound. Current U.S. consumption data might instead suggest that many consumers are on the sidelines. But rather than clutching their pocketbooks, consumers are reaching for their smartphones and using digital technology to find bargains online and to share goods, potentially influencing the data.

Europe's Slow Climb
By Mick Dillon, CFA, Portfolio Manager, Global Leaders Strategy; Priyanka Agnihotri, CFA, Equity Research Analyst

Greece’s debt crisis has dominated the headlines in Europe this year but has not halted regional growth or vitality among European companies showing unexpected earnings strength.

Dream or Opportunity?
By Taylor Graff, CFA, Asset Allocation Analyst

China’s plummeting stock prices, slowing economic growth and currency volatility have pushed many investors out of the market. Nevertheless, we believe that a discriminating investment strategy toward China and neighboring emerging markets has the potential to yield meaningful long-term gains, especially from growth in China’s middle class.

Before Tying the Knot
By Chad Larson, Strategic Advisor

Although the divorce rate has fallen for many years, the emotional and financial costs from a split-up are often very high. Protecting inherited assets from a claim by a family member’s ex-spouse can help limit those losses. Such protection can be a cornerstone for sound estate planning.

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. The companies written in bold-face are stocks currently held by Brown Advisory strategies. The Barclays Municipal Bond Index is an unmanaged index representative of the tax-exempt bond market. One cannot invest directly in an Index.


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