BBH Core Select Buys Businesses, Not Stocks
At their regular Monday morning meetings in New York City, the managers of BBH Core Select (symbol BBTEX) -- Michael Keller, Tim Hartch and Rick Witmer -- recently talked about their fund’s holdings. In particular, they discussed whether to trim or add to any positions and whether any stock’s price had surpassed their estimate of the company’s worth.
What they didn’t discuss -- and rarely do -- was the fund’s recent performance. That’s because the managers tend to invest for the long haul and, if necessary, will wait “indefinitely” for the market to recognize what they think a company is worth, says Keller.
Not that BBH’s short-term performance is anything to be ashamed of. Year-to-date through July 3, the fund has returned 11.1%. And over the past year, it gained 7.4%. The figures beat Standard & Poor’s 500-stock index by 0.6 percentage point and 2.6 points, respectively.
Like Warren Buffett, says Keller, the trio think about owning and investing in businesses -- not stocks. (The fund’s top holding is Buffett’s Berkshire Hathaway.) Says Keller: “We find it’s somewhat helpful to think, What if we were business owners and we were buying businesses we believed in strongly and growing them over time and increasing the per-share value?” In that context, the daily, yearly or even two- or three-year swings in performance are less important, Keller says, than this basic question: “Did I buy a good company, and is the value increasing while I own it?”
For Hartch and Witmer, who joined the fund in 2005, and Keller, who became a co-manager in 2008, this approach has paid off handsomely. The fund’s 5.5% five-year average return ranks among the top 1% of its category -- large blend -- and outpaces the S&P 500 by 5.4 percentage points.
Chalk it up to the trio’s investment strategy. Keller, Hartch and Witmer look for well-positioned industry leaders that sell an essential product or service and have a loyal customer base. If a stock meets the conditions and trades at a 25% discount to what the managers think it is worth, it gets a spot in the portfolio. And they sell only when the stock meets its intrinsic value measure. They bought shares in credit card services company Visa (V) in late 2010 “when others had concerns about the debit market,” says Keller. By April 2012, the stock was up 60%, it hit the target, and they sold.
In recent years, the fund has weathered bad spells well, which is one of the reasons it’s in the Kiplinger 25, the list of our favorite no-load mutual funds. Like most stock funds, BBH Core Select lost a lot of money in 2008. But its 21.5% decline beat the overall market’s loss by 15 percentage points. And last year -- another troublesome time for stocks -- the fund walloped the S&P 500’s 2.1% return with a 5.7% gain. “We have the explicit goal of protecting capital in down markets,” says Keller. BBH Core Select has a five-year downside capture rate of 70%, meaning that over the past five years, the fund has lost about 30% less than its benchmark (the S&P 500) during periods of negative returns.
The portfolio contains just 28 stocks. “We’re a focused fund,” says Keller. Many people think a core fund -- as he describes BBH Core Select -- holds a larger number of stocks. But those funds tend to “end up looking a little like the S&P 500,” he says,
The managers keep what they call a “wish list” of about 150 companies that fit their qualitative criteria, and they wait for the stocks’ prices to break their way. But Keller says they “want to be careful” about adding new names. Sometimes that calls for a little patience with the stocks they already hold.
The fund has held shares of Baxter International (BAX), for instance, for nearly two years. It’s a leader in medical therapies for hemophilia, kidney disease and immune disorders, among others. The company has a top-notch management team, says Keller, and it has a loyal customer base among the physicians and hospitals that use its products. The stock has been flat since the BBH managers first started buying it in late 2010. “But that’s OK,” says Keller. “We’d continue to add to the position, assuming there was no degradation in the business.”
On the flip side in the portfolio is eBay (EBAY), the fund’s best performer year-to-date. The managers started buying it in 2008 when other investors “underestimated the business.” Keller says others failed to see the long-term benefits of the company’s strategy for its PayPal unit and the improving fortunes of its traditional online auction business. EBay shares have climbed 39% since the beginning of 2012.
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