Value Added


A Fund That Wins by not Losing

Steven Goldberg

Preserving your capital is BBH Core Select’s first goal. That makes it my kind of fund.



If the bull market that began last October continues, BBH Core Select N (symbol BBTEX) will almost certainly lag the major stock indexes. Indeed, through March 5 of this year, the fund returned 8.3%, trailing Standard & Poor’s 500-stock index by 0.6 percentage point.

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But given the continued existence of huge risks to the global economy, the last thing I’m worried about is keeping pace in a bull market. I’m much more interested in investing in funds that will hold up well in a bear market or a choppy market. And in lousy markets, BBH Core Select should shine.

It certainly did in the last bear market. During the 2007-09 conflagration, BBH fell 41.1%, compared with a 55.3% loss for the S&P 500. That’s one reason it’s a member of the Kiplinger 25, the list of our favorite actively managed funds.

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How did the fund hold up so well? The three managers and nine analysts start with a “wish list” of 160 stocks selected using stringent qualitative criteria. They hunt for companies that are leaders in growing businesses, that sell essential products and services to a loyal customer base, that boast a distinct set of competitive advantages and that are run by ethical managers who are good at allocating profits and who own substantial stock in their company. “Once you insist on these criteria, most companies don’t fit,” says Michael Keller, who runs the fund with Tim Hartch and Richard Witmer Jr.

From the wish list, the managers and analysts identify 25 to 30 stocks that are currently cheap enough to buy. They use a variety of tools to determine whether a stock is a bargain. They hold each stock until it reaches their estimate of full value, which typically takes about five years.

This highly disciplined process has produced a fund that has been about 20% less volatile than the S&P despite holding so few stocks. It leads the managers to stocks that are close to bulletproof -- indeed, it’s hard for me to see any of them falling apart. Currently, 40% of the fund is in low-risk consumer staples and health care stocks, including Nestlé SA (NSGRY.PK), the Switzerland-based food giant; drug maker Novartis AG ADR (NVS), also based in Switzerland; and Diageo PLC (DEO), the British spirits producer. Foreign stocks account for 17% of the fund’s assets.

Another 27% is in relatively simple financial stocks -- in other words, not money center banks that are too complex to understand. The fund’s biggest holding, for instance, is Berkshire Hathaway (BRK.A). It also owns Visa (V) and insurer Chubb (CB).

BBH Core Select owns two banks: U.S. Bancorp (USB) and Wells Fargo (WFC). “These are old-style banks that make their money from deposits and make loans to businesses and consumers,” Keller says.

The managers recently bought tech giant Google (GOOG) and added to their investment in Microsoft (MSFT). The fund also owns eBay (EBAY).

Core Select is a large blend fund -- that is, it invests in stocks that display a blend of both value and growth characteristics. The stocks have market values (share price times number of shares outstanding) of $5 billion or greater. Most of the fund’s holdings are significantly larger; the average market value of its stocks is $50 billion.

BBH Core Select has one negative: The managers haven’t run the fund all that long. Hartch and Witmer have been in place only since October 2005, and Keller became a manager in 2008. Since 2005, the fund has excelled in years when high-quality companies have done well and lagged in 2008 and 2009, when quality stocks trailed.

A substantial portion of the fund’s great five-year record stems from wonderful relative returns in 2007 and 2008. Over the past five years through March 5, the fund returned an annualized 7.7%, an average of 5.7 percentage points per year ahead of the S&P. During that same stretch, the fund ranked in the top 1% among large blend funds.

I think this fund is worth buying in spite of its relatively short record under the current managers. The fund’s assets total just $1.3 billion, although the management firm runs about $10.5 billion using the core select strategy. Keller thinks the team can manage a little more than $15 billion.

BBH stands for Brown Brothers Harriman & Co., which was founded in 1818, and is the oldest and largest private bank in the U.S. Unlike such competitors as Goldman Sachs, Brown Brothers chooses not to issue shares to the public. Continued ownership by private partners gives the firm a bigger incentive to reduce risks. That’s all to the good for fund investors.

The N shares have a $10,000 minimum investment, but you can invest through many online brokers for less. The expense ratio is 1%. I’d avoid the lower-minimum retail shares (BBTRX), which cost 1.25% annually.

Steve Goldberg (bio) is an investment adviser in the Washington, D.C., area.



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