US Smaller Companies Fund* Review and Outlook

Transcription

1 US Smaller Companies Fund* Review and Outlook The strategy recorded strong gains during the third quarter of 2013, comparing favorably with our primary benchmark, the Russell 2000 Growth Index, as well as the broader small-cap Russell 2000 Index. Our results were driven primarily by stock-specific performance as several of the portfolio's multiyear holdings appreciated meaningfully. Importantly, we believe that the strategy maintains a good balance between offense and defense, and we are holding some cash in an effort to insulate the portfolio from a potential market pullback and to provide buying power if and when opportunities arise. Robust market performance in the third quarter pushed valuations to new highs. Catalysts for the market s run can be summarized aptly by Margaret Thatcher s famous acronym T.I.N.A. for many investors, There Is No Alternative to U.S. stocks at the moment. This logic is simplistic, yet persuasive to many. At the macro level, the United States appears to be the healthiest and most consistently growing major developed economy, the Federal Reserve is holding steady for now with its highly accommodative monetary policy, and the bond market offers little in the way of return against potentially mounting risks. The conclusion: invest in U.S. equities. More specifically, invest in small-cap equities, as we believe that they are a more leveraged play on the domestic economy compared to their large-cap peers. software as a service (SaaS), big data, mobile technology, social media or select areas of biotechnology are clearly visible as such, and therefore we believe that we can manage the associated risks. In our view, great future investments will emanate from these exciting investment areas (and we hope that we hold some of these in the portfolio already), but prudence is warranted as we look for rewarding opportunities along the road less traveled by the broad market. It has been a wonderful year to be a U.S. equity investor, particularly one focused on small-cap growth businesses, but we are more vigilant than ever in examining our portfolio for pockets of excessive expectations and valuations. If we can maintain that balance between offensive and defensive positions, we believe that we can steer the strategy toward favorable results over time. Against this positive backdrop, growth stocks outperformed more value-oriented plays during the quarter. The global economy is struggling to produce growth, and many investors distrust the veracity and sustainability of the economic recovery. This growth scarcity and accompanying uncertainty about more cyclically driven investments, seem to be driving the price of companies with secular growth prospects ever higher. Fortunately, we believe that the areas where the market is potentially overvalued such as cloud computing and *Brown Advisory US Smaller Companies Fund is the UCITS Fund of the Brown Advisory Small-Cap Growth Strategy. Please see disclosure statements at the end of this presentation for additional information and for a complete list of terms and definitions.

2 Sector Diversification Consumer discretionary decreased in weight during the period due to the elimination of two holdings. Consumer staples increased in weight following the addition of a new name in the sector. Energy declined in weight following a substantial reduction in size of a single position. SECTOR Consumer Discretionary SMALL-CAP GROWTH RUSSELL 2000 GROWTH INDEX DIFFERENCE SMALL-CAP GROWTH Q3 13 Q3 13 Q3 13 Q2 13 Q Financials increased modestly in weight due primarily to the outperformance of our holdings relative to the benchmark. Health care remains an underweight; however, the gap vs. the benchmark is reduced substantially if one takes into account several of our technology and business services holdings with meaningful exposure to health care-related end markets. We maintain a significant overweight in industrials although the positions are quite diverse in their endmarket and geographic exposure. Additionally, several of our holdings could be allocated reasonably to other market sectors given the nature of their businesses. Information technology is the largest weighting in the portfolio, but like our industrials allocation, we believe that the weighting is overstated based on how our holdings are classified. Consumer Staples Energy Financials Health Care Industrials Information Technology Materials Telecommunication Services Utilities Source: FactSet. 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. References to specific securities are for illustrative purposes only and do not represent all of the securities purchased, sold or recommended for advisory clients. The portfolio information provided is based on a representative Small-Cap Growth account and is provided as supplemental information. Sector diversification excludes cash and cash equivalents. Sectors are based on the Global Industry Classification Standard (GICS) classification system. Please see disclosure statements at the end of this presentation for additional information and for a complete list of terms and definitions.

3 Quarterly Attribution Detail by Sector SMALL-CAP GROWTH RUSSELL 2000 GROWTH INDEX ATTRIBUTION ANALYSIS SECTOR AVERAGE WEIGHT RETURN AVERAGE WEIGHT RETURN ALLOCATION EFFECT SELECTION & INTERACTION EFFECT TOTAL EFFECT Consumer Discretionary Consumer Staples Energy Financials Health Care Industrials Information Technology Materials Telecommunication Services Utilities Total Three sectors financials, health care and information technology provided the bulk of the positive contribution during the quarter, while energy and industrials were the primary detractors from performance. A couple long-term holdings drove results in health care. We underperformed the benchmark within energy due to company-specific issues experienced by a single holding. Source: FactSet. Total portfolio return figures provided above reflect the sum of the returns of the equity holdings in the representative account portfolio due to price movements and dividend payments or other sources of income, and exclude cash. Performance figures may vary from actual portfolio performance, as calculations are based on end-of-day security prices and do not incorporate the actual cost basis or sale price of individual securities. The portfolio information provided is based on a representative Small-Cap Growth account and is provided as supplemental information. Sectors are based on the Global Industry Classification Standard (GICS) classification system. Sector attribution excludes cash and cash equivalents. Please see disclosure statements at the end of this presentation for additional information and for a complete list of terms and definitions.

4 Quarterly Contribution to Return Incyte announced positive phase II data for Jakafi for the treatment of pancreatic cancer. Several holdings have shown persistent results over the past several quarters. Interactive Intelligence generated very strong bookings, and we believe that the company can achieve 20%+ revenue growth over the next several years. CoStar posted solid results due to the slow and steady recovery in the commercial real estate market and its acquisition of LoopNet, the company s top competitor. Applied Micro demonstrated further progress in its ARM-based server chip, a new market opportunity. Small-Cap Growth Top Five Contributors NAME AVERAGE WEIGHT RETURN CONTRIBUTION TO RETURN INCY Incyte Corporation ININ Interactive Intelligence Group Inc HEI HEICO Corporation CSGP CoStar Group Inc Heico announced quarterly results that backed up management s forecast that orders in its key end market would pick up in the second half of the year. AMCC Applied Micro Circuits Corporation Total Homeaway gave back some of its strong year-to-date gains as investors attempt to balance the short-term risk and the longterm potential of the company s pay-per-booking model. BJ s Restaurants is facing challenges from substantial competition in the casual-dining space, but in our view the concept is sound and the growth outlook compelling, causing us to modestly increase our small position on weakness. UTi Worldwide felt the effects of a sluggish airfreight market in its quarterly results. Riverbed dropped due to concerns over end-market saturation in WAN optimization. World Fuel fell on the low-probability, but potentially highimpact event that the company would be partially liable in a Canadian railroad oil spill. Small-Cap Growth Bottom Five Contributors NAME AVERAGE WEIGHT RETURN CONTRIBUTION TO RETURN AWAY Homeaway Inc BJRI BJ's Restaurants Inc UTIW UTi Worldwide Inc RVBD Riverbed Technology Inc INT World Fuel Services Corporation Total Source: FactSet. 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. References to specific securities are for illustrative purposes only and do not represent all of the securities purchased, sold or recommended for advisory clients. The portfolio information provided is based on a representative Small-Cap Growth account and is provided as supplemental information. Top five and bottom five contributors exclude cash and cash equivalents. Please see disclosure statements at the end of this presentation for additional information and for a complete list of terms and definitions.

5 Additions/Deletions Cvent, a leader in event-management software, went public and we participated based on our historical knowledge of the business. E2open operates a cloud-based network for distributed global supply chains. Small-Cap Growth Portfolio Activity ADDITIONS SECTOR Fair Isaac is known for its FICO credit scoring offering and also provides advanced software for bank-fraud prevention and other services. Stage Stores operates retail stores in mostly small and mid-sized communities, bringing national brands to underserved markets. Susser Holdings owns and operates the Stripes chain of convenience stores in the Southwestern U.S. and holds a minority interest in Susser Petroleum, a Master Limited Partnership. Six companies were eliminated: Catamaran, ExactTarget (acquired by salesforce.com), Monro Muffler, Quanex, SHFL entertainment (acquired by Bally) and Vitamin Shoppe. Aside from the two acquired companies, we chose to take profits in Monro Muffler, Quanex and Vitamin Shoppe as our conviction on the stocks faded after a re-examination of the companies end markets. Catamaran recently our largest holding was approaching $11 billion in market capitalization at the time of sale, and we believed that our thesis for the stock had largely played out. CVT Cvent Inc. Information Technology EOPN E2open Inc. Information Technology FICO Fair Isaac Corporation Information Technology SSI Stage Stores Inc. Consumer Discretionary SUSS Susser Holdings Corporation Consumer Staples DELETIONS SECTOR CTRX Catamaran Corporation Health Care ET ExactTarget Inc. Information Technology MNRO Monro Muffler Brake Inc. Consumer Discretionary NX Quanex Building Products Corporation Industrials SHFL SHFL entertainment Inc. Consumer Discretionary VSI Vitamin Shoppe Inc. Consumer Discretionary Source: FactSet. 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. References to specific securities are for illustrative purposes only and do not represent all of the securities purchased, sold or recommended for advisory clients. The portfolio information provided is based on a representative Small-Cap Growth account and is provided as supplemental information. Sectors are based on the Global Industry Classification Standard (GICS) classification system. Please see disclosure statements at the end of this presentation for additional information and for a complete list of terms and definitions.

6 Portfolio Characteristics SMALL-CAP GROWTH RUSSELL 2000 GROWTH INDEX Number of Holdings 59 1,117 Market Capitalization ($ B) Weighted Average Weighted Median Maximum Minimum P/E Ratio FY2 Est. 23.5x 19.0x Earnings Growth 3-5 Yr. Est PEG Ratio Dividend Yield Top 10 Equity Holdings Portfolio Turnover Source: FactSet. The portfolio information provided is based on a representative Small-Cap Growth account and is provided as supplemental information. Portfolio characteristics exclude cash and cash equivalents. Please see disclosure statements at the end of this presentation for additional information and for a complete list of terms and definitions.

7 Portfolio Allocation % CONSUMER DISC. CONSUMER STAPLES ENERGY FINANCIALS HEALTH CARE INDUSTRIALS INFO. TECH MATERIALS TELECOM SERVICES UTILITIES Third Quarter 2013 Sector Diversification Small-Cap Growth Russell 2000 Growth Index Source: FactSet. The portfolio information provided is based on a representative Small-Cap Growth account and is provided as supplemental information. Sector diversification excludes cash and cash equivalents. Sectors are based on the Global Industry Classification Standard (GICS) classification system. Please see disclosure statements at the end of this presentation for additional information and for a complete list of terms and definitions.

8 Disclosure The views expressed are those of the author 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. 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 for our clients and is provided for informational purposes only. It should not be construed as a research report. The benchmark is the Russell 2000 Growth Index. The Russell 2000 Growth Index measures the performance of the small-cap growth segment of the U.S. equity universe. It includes those Russell 2000 Index companies with higher price-to-book ratios and higher forecasted growth values. The Russell 2000 Growth Index is constructed to provide a comprehensive and unbiased barometer for the small-cap growth segment. The Index is completely reconstituted annually to ensure that new and growing equities are included and that the represented companies continue to reflect growth characteristics. The Russell 2000 Index measures the performance of the small-cap segment of the U.S. equity universe. It is a subset of the Russell 3000 Index representing approximately 10% of the total market capitalization of that index. It includes approximately 2000 of the smallest securities based on a combination of their market cap and current index membership. The Russell 2000 Index is constructed to provide a comprehensive and unbiased small-cap barometer and is completely reconstituted annually to ensure that larger stocks do not distort the performance and characteristics of the true small-cap opportunity set. The Russell 2000 Growth Index and the Russell 2000 Index are trademarks/service marks of the Frank Russell Company. Russell is a trademark of the Frank Russell Company. An investor cannot invest directly into an index. Figures shown on sector diversification and quarterly attribution by detail slides may not total due to rounding. Brown Advisory is the marketing name for Brown Advisory, LLC, Brown Investment Advisory & Trust Company, Brown Advisory Securities, LLC, Brown Advisory Ltd., Brown Advisory Trust Company of Delaware, LLC, and CDK Investment Management, LLC.

9 Terms And Definitions All financial statistics and ratios are calculated using information from FactSet as of the report date unless otherwise noted. The Average Weight of a position or sector refers to the daily average for the period covered in this report of a stock s value as a percentage of the portfolio. The Total Return of an equity security is the sum of the return from price movement and the return due to dividend payments or other sources of income. Standard benchmark-, sector- and portfolio-level returns are the sums of the weights of each security multiplied by its return, summed and calculated daily and summed over the period covered by the report or by an otherwise-noted period. Allocation Effect measures the impact of the decision to allocate assets differently than those in the benchmark. Selection and Interaction Effect reflects the combination of selection effect and interaction effect. Selection effect measures the effect of choosing securities that may or may not outperform those of the benchmark. Interaction effect measures the effect of allocation and selection decisions (i.e., did we overweight the sectors in which we underperformed). Total Effect reflects the combination of Allocation, Selection and Interaction effects. Totals may not equal due to rounding. Contribution To Return is calculated by multiplying a security s beginning weight as a percentage of a portfolio by that security s return for the period covered in the report. Market Capitalization refers to the aggregate value of a company s publicly traded stock. Statistics are calculated as follows: Weighted Average: the average of each holding s market cap, weighted by its relative position size in the portfolio (in such a weighting scheme, larger positions have a greater influence on the calculation); Weighted Median: the value at which half the portfolio's market capitalization weight falls above and half falls below; Maximum and Minimum: the market caps of the largest and smallest companies, respectively, in the portfolio. Price-Earnings Ratio (P/E Ratio) is the ratio of the share of a company s stock compared to its per-share earnings. P/E calculations presented use FY2 earnings estimates; FY1 estimates refer to the next unreported fiscal year, and FY2 estimates refer to the fiscal year following FY1. Earnings Growth 3-5 Year Est. is the average predicted annual earnings growth over the next three to five years based on estimates provided to FactSet by various outside brokerage firms, calculated according to each broker s methodology. P/E / Growth Ratio, or PEG Ratio, is the ratio of a portfolio s P/E Ratio divided by its Est. 3-5 Yr. EPS Growth rate. Dividend Yield is the ratio of a stock s projected annual dividend payment per share for the fiscal year currently in progress, divided by the stock s price. Portfolio Turnover is the ratio of the lesser of the portfolio s aggregate purchases or sales during a given period, divided by the average value of the portfolio during that period, calculated on a monthly basis. Portfolio turnover is provided for a three-year trailing period. All of the above ratios for a portfolio are expressed as a weighted average of the relevant ratios of each portfolio holding, EXCEPT for P/E ratios, which are expressed as a weighted harmonic average.