It is a truth universally acknowledged, that hardly anyone sets out to be a financial journalist, most fall into it. However, every so often, a journalist is rewarded with an interview which confirms how fortunate the ‘fall’ actually was. This was exactly the case when thewealthnet spoke to Mick Dillon, portfolio manager of Brown Advisory’s Global Leaders Fund.
In a short hour and ten minutes Mr Dillon broke the mould of a formulaic fund profile interview by putting a human face on figures and facts, engaging the whole room with sports analogies and personal stories, whilst never steering far away from his great passion – the strategy itself.
Mr Dillon and co-portfolio manager Bertie Thomson invest in companies “that are global leaders, as demonstrated by their persistent high relative return on invested capital (ROIC)”.
“We believe that high returns on capital typically can be attributable to, among other things, a strong competitive position and defensible barriers to entry”. Messrs Dillon and Thomson use a “research-intensive approach to building a concentrated, truly global, portfolio of typically under 40 companies.
Recently, the $191 million strategy marked its three year anniversary, returning 11.3 percent, net of fees, annualised since inception, beating its benchmark (Russell Global Large-Cap Net Index) by 4.4 percent per annum. More recently, the fund delivered a 20 percent one year return.
So how do they do it? The strict four-step set of criteria the team adheres to in order to uncover investable opportunities sounds rigorous enough. They begin with franchise quality, where the team must see a superior customer outcome for every investment, and they look for sustainable businesses "with multiple economic moats and competitive advantages". In the second step, management quality, Messrs Dillon and Thomson look for attributes of "high quality management teams". An outcome is that teams with long-term track records tend to be favoured, with over half of the portfolio companies being run by the original founders or their family at the helm.
Step three is quantitative measures, a key flag post is 20+ percent ROIC, or a visible pathway to 20 percent. Finally, the team looks at investability (valuation), which is where many potential investments fail. The team estimates future cashflows by considering, amongst other things: FCF growth, ROIC and competitive advantage period.
“This is about finding absolute value –not relative valuation. Thus the fun bit, the treasure hunt for stocks begins.”
This process has worked over the years, combined with the passion for detail Mr Dillon and the rest of the team have. “We obsess over the customers. We really believe in the primacy of the customer, they have to come back. Good businesses always serve the customer, best businesses do it in a unique way.”
Here Mr Dillon also stressed the point about the fallacy of shareholder mentality. “Shareholders are actually the last in the chain, they get residual money. Whatever shareholders want, it comes from customers first.”
Mr Dillon and his team are also particularly impassioned about a point which sets the fund apart from similarly constructed strategies - their primary research team. This team interviews customers as part of the investment process, be it surgeons using a heart valve manufactured by Edwards Lifesciences Corporation, which is in the fund’s top ten equity holdings; or engineers who install aircraft equipment.
Another discussion point, which ends up almost overshadowing the others, is the learning culture and open mindedness throughout the firm, and in this team in particular. It helps that everyone has some equity in the firm, which “fosters collaboration”.
“It is an enormous learning environment, and we get to leverage resources in a very powerful way. Members of our team are from all over the world, and they have lived and worked all over the world too; so we have different perspectives from each one of them,” said Mr Dillon.
As part of the learning and developing process, Brown Advisory shares the psychological profiling of the portfolio managers with the analysts in an attempt to help communication with each other. They also employ an independent third party ‘coach’ to analyse every single investment decision made by the portfolio managers. At first this sounds like something out of the hit drama “Billions” about New York high finance, but explained by Mr Dillon, it starts to make rational sense.
“It’s the same as having a sports coach. The coach has a different perspective, they see what you can’t see in the heat of the moment. Same as sport, investment is a team game. It’s about probability and team work. Outside analysis and psychological exercises help our process remain disciplined, rigorous, repeatable and robust. We continuously re-test, and we adapt to new ways. Old investments are constantly reviewed too. It’s very different at Brown Advisory. We are all talking, all contributing, all evolving. Everyone is valued.”
Delivering strong performance is not just about stock selection, it is also about capital allocation. “The successful combination of these two aspects of portfolio management is what drives positive absolute and relative returns.”
As Mr Dillon put it – “we have some very strict rules, but these rules give us the freedom to act, as the probability for outperformance is in our favour.”
Brown Advisory is a private, independent investment and strategic advisory firm managing over $65 billion in client assets.