Objective and strategy
The managers seek long-term capital appreciation by investing in a concentrated portfolio of 30-40 mid and large capitalization companies that use sustainable business strategies (SBA) to drive future earnings growth.
They focus on finding companies whose sustainability strategies are generating tangible business results such as revenue growth, cost improvement, or enhanced franchise value. Such companies may enjoy competitive advantages from environmentally efficient design or manufacturing or offer products or services that address sustainability challenges.
Sustainable business advantage analysis complements thorough fundamental research and a strict valuation discipline. Only companies with strong fundamental, sustainable, and valuation characteristics are considered for investment.
Adviser
Brown Advisory, a private independent investment management firm founded in 1993 in Baltimore within Alex Brown & Sons. The firm employs 600 people in eight offices, manages 15 mutual funds, is a sub-adviser on four others, and runs 29 additional investment strategies. Total firm AUM as of September 30, 2018: $68.4B with $8.7 billion of that in their mutual funds.
Managers
Karina Funk and David Powell. Ms. Funk, CFA, joined Brown Advisory in 2009 from Winslow Management Company where she was a Portfolio Manager and Equity Research Analyst running an ESG- focused equity mutual fund. Brown acquired Winslow in 2012. Her academic credentials are in chemical and environmental engineering from first-tier universities in the US and France. Mr. Powell joined Brown Advisory in 1999 as an equity research analyst. Prior to joining the firm, David held a position in investor relations at T. Rowe Price. They are supported by three equity analysts.
Strategy capacity and closure
In the neighborhood of $15 billion, which is not excessive for a global, large cap strategy. Total AUM in the strategy (mutual funds, a UCITS European mutual fund, and separate accounts) was approximately $1.8B as of September 30, 2018.
Management’s stake in the fund
As of June 30, 2018, Ms. Funk owns between $100,000-500,000 of the fund and Mr. Powell over $1,000,000. As of December 31, 2017, only one of the four independent trustees had a personal investment in the fund.
Opening date
June 29, 2012 and an SMA from December 31, 2009. The PMs manage these products exclusively.
Minimum investment
Institutional Shares $1,000,000; Investor and Advisor Shares $100.
BAWFX is available for purchase through 34 brokerages, including major platforms such as JPMorgan, TD Ameritrade, Vanguard, Fidelity, and Schwab.
BIAWX is available for purchase through 33 brokerages, including major platforms such as JPMorgan, Merrill, TD Ameritrade, Vanguard, Fidelity, and Schwab.
BAWAX available for purchase through 37 brokerages, including major platforms such as JPMorgan, TD Ameritrade, Vanguard, Fidelity, and Schwab
Expense ratio
Institutional 0.63%; Investor 0.78%; Advisor 1.03%. Assets under management is $7.2 Billion.
Comments
The environmental and business cases for incorporating ESG factors into your portfolio are unassailable. It is very clear that the behavior of corporations contributes directly, for good or ill, to the habitability of the planet. It’s equally clear that investing in sustainable enterprises does not harm your returns, and might well bolster them. Larry Fink, president of BlackRock, the world’s largest investment firm, argues that within five years “all investors will be using ESG (environmental, social, governance) metrics to determine the value of a company.” That’s perfectly rational. An October 2018 review of the research by the Boston Consulting Group concludes that “ESG-driven decisions implemented well go far beyond good marketing, and actually boost the bottom line because they are more sustainable than decisions made to boost stock price in the short term” (Business Insider, 11/1/2018). That aligns well with both the research done by the Brown Advisory managers and with their performance.
The way to make money on companies with great ESG characteristics is to invest first in fundamentally strong companies that will outperform over time. So they look at their return on equity, earnings variability, historical earnings per share growth plus other factors.
Once they identify these companies, they can begin looking more deeply into whether a company’s management team understands its long-term sustainability risks and opportunities and is investing in them materially.
They use the term “sustainable business advantage,” or SBA, to describe the characteristics in a company’s business strategy that can add shareholder value through sustainability. Companies with great fundamentals and the potential to propel those outcomes through SBA are the companies they want to own.
It’s this intersection of company performance and ESG focus that defines sustainable investing for these managers.
On whole, the managers worry rather more about producing alpha, i.e., market-independent returns, than they do about managing beta, also known as market risk. Even so, the fund tends to generate below average volatility across time and across a variety of measures.
The fund does exceptionally well, against any plausible benchmark, over time. We first screened Lipper’s Socially Conscious (SC) category for U.S., global, and international multicap growth.
| BAWFX | |
| One year | 13.4%, 2nd |
| Two year | 19.4%, 1st |
| Three year | 20.3%, 1st |
| Five year | 13.9%, 1st |
Our second screen broadened the search to include all multicap growth funds, domestic, global or international, socially conscious or not. The results remain impressive.
Second, we looked at the fund’s performance relative to the S&P 500 and its benchmark index, the Russell 1000 Growth. The S&P is a flawed comparison because the investment styles are substantially different, but a relevant one because so many investors use the S&P as their implicit benchmark for any equity investment. The Russell 1000 Growth is pretty spot-on.
| BAWFX beat the S&P 500 by … | BAWFX beat its benchmark Russell 1000 Growth by | |
| One year | 8.7% | 6.1% |
| Three year | 5.0% | 1.1% |
| Five year | 3.2% | 0.8% |
| Since inception | 3.2% | 0.9% |
The managers admit that they will underperform the market at times. The Russell 1000 Growth Index has been red hot for the past decade, averaging an annual return of 18.2%. The PMs looks for steady, not rapid growth. Now in the tenth year of a bull market, they are careful to avoid chasing momentum-led stories. That’s produced a nice asymmetry in which they capture most of their benchmark’s upside but much less of its downside.
Bottom Line
- The mangers make money. With an 18.0% lifetime APR, BAFWX is an MFO Great Owl in the multicap growth category. That means it has consistently received a return rank of 5 (Best) for all periods three years and longer. It joins only nine other GO funds in that category. Investors have not sacrificed returns or experienced a tradeoff from using ESG characteristics in the portfolio.
- The managers are smart, careful, and even cynical. Just because a company issues a sustainability report, doesn’t mean that it’s added value. They’re only interested in companies that make an ESG impact. Their legacy and reputation is based on repeatedly finding companies that hinge on sustainable growth drivers well before the rest of the market catches up.
- The managers’ strategy is different. They don’t use ESG to find companies that they believe are less harmful than others. They don’t invest passively though a best-in-class approach aiming to find the best “scorers” in each industry trying to match the risks and returns of the broad market and therefore unlikely to outperform their benchmark.
They can earn a profit and help the planet — as has the fund — while ESG continues to move consistently to the center of corporate thinking on strategy, risk, reputation, operations, efficiency, and long-term performance.
Fund Website
Karina Funk Sustainability TED Talk
