U.S. Flexible Equity SRI Fund Review and Outlook

Transcription

1 U.S. Flexible Equity SRI Fund Review and Outlook In mid-april, this Fund underwent a change of name and investment policy. In consultation with shareholders and following their approval, the name was changed from American SRI Fund to U.S. Flexible Equity SRI Fund. The investment policy was also realigned to reflect the Brown Advisory U.S. Flexible Equity investment philosophy, and so this Fund is now managed by Hutch Vernon and Mike Foss. Flexible Equity expands the bargain hunting concepts of value investing to a broad range of investments, emphasising individual security selection based on identifying long-term attractive businesses with shareholder-oriented managers, and purchasing them when they are available at bargain prices. These bargains can arise due to short-term investor perceptions, temporary business difficulties that will improve, or as yet undiscovered opportunities and unrecognized changes for the better. The S&P 500 Index barely budged during the second quarter, gaining just 0.3% after the addition of dividends. During the first six months of 2015, the Index rose 1.2%. The U.S. Flexible Equity SRI Fund declined slightly during the quarter, returning -0.3%. Long-term, the Flexible Equity strategy compares favorably with its benchmark, the S&P 500 Index. Investors should anticipate lower returns on equities in the next three- and five-year periods compared with past performance. Stock valuations, economic activity and investor sentiment are higher today compared with the past, so investors should temper their expectations. Our thinking is summed up by a quote from John Templeton, the late investor and philanthropist: Bull markets are born on pessimism, grow on skepticism, mature on optimism and die on euphoria. A review of stock market history whether the broad stock market, notable sectors or individual companies reveals a consistent pattern in which investor emotion tugs equity prices up or down. To use Templeton s phrasing, our best characterization of the current U.S. equity market is that it is maturing on optimism. That is not to say we are bearish. The U.S. economy s long-term record of innovation, development and adaptation supports an optimistic outlook. The cycles in investor emotions occur around a rising trend of economic progress. Also, the broad valuation of stocks, although higher than we prefer on the basis of prospective returns, is not excessive in our view, particularly in an environment of unusually low interest rates. We changed very little in our portfolio during the second quarter, adding slightly to a few holdings but starting nothing new. We slightly trimmed one holding. While we are always looking for better ideas, we like the business prospects of our current holdings and, importantly, what we are paying for these companies when compared with the broader market. We researched quite a few companies during the second quarter. This is an ongoing process, but the second quarter is the high point for the number of annual reports and proxies that arrive from companies. Always notable among these is the Berkshire Hathaway annual report and its letter from CEO Warren Buffett. This year marks the 50 th year since Buffett took control of Berkshire, and the latest report reflects on the past, present and future of this enterprise. It is available at Our notes from the recent annual shareholders meeting at Berkshire are available at The performance provided is based on the B USD Share Class of the Fund and is net of management fees and operating expenses. Past performance may not be a reliable guide to future performance and you may not get back the amount invested. Changes in exchange rates may have an adverse effect on the value price or income of the product. The difference at any one time between the sale and repurchase price of units in the UCITS means that the investment should be viewed as medium to long term. This is not an invitation to subscribe and is by way of information only. Please see disclosure statements at the end of this presentation for additional information.

2 SRI Screens As of 06/30/2015 The exclusions from the U.S. Flexible Equity SRI Fund at the end of the second quarter are as follows: United Technologies Corp.: involvement in controversial weapons

3 Sector Diversification Our sector allocation is based on individual stock selection coupled with a reasonable balancing of economic exposures for risk management. Our motivation in portfolio decisions is primarily specific to our research of a company rather than a reflection of our view about a particular sector. There was little change in the sector weightings because of the low level of purchase and sale activity in the quarter. The overall weighting in the industrials sector declined as the share prices of our industrial holdings fell in the quarter. Our three transportation companies fell the most within this sector. The weighting in the information technology sector rose with gains in the share prices of several holdings, most notably in MasterCard and Microsoft. We have no investments at present in the materials or utilities sectors. SECTOR U.S. FLEXIBLE EQUITY SRI FUND (%) S&P 500 INDEX (%) DIFFERENCE (%) Q2 15 Q2 15 Q2 15 Consumer Discretionary 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 the U.S. Flexible Equity SRI Fund. 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.

4 Quarter-to-Date Attribution Detail by Sector U.S. FLEXIBLE EQUITY SRI FUND S&P 500 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 Source: FactSet. Total Financials and information technology were our best-performing sectors and our best relative to the S&P 500 Index. Among financials, our bank holdings and Charles Schwab rose nicely because of the prospects of rising interest rates. Several holdings contributed to gains in information technology shares. MasterCard was the top performer in the portfolio. We did not own any utilities, the worst-performing sector in the S&P 500 Index. The sector was hurt by rising interest rates. Consumer discretionary and industrials were our biggest detractors. While Walt Disney was a very strong contributor, our other consumer discretionary investments fell. Each of our holdings in the industrials declined. 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 the U.S. Flexible Equity SRI Fund. 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.

5 Quarter-to-Date Top Five Contributors to Return U.S. Flexible Equity SRI Fund Top Five Contributors NAME DESCRIPTION AVERAGE WEIGHT (%) RETURN (%) CONTRIBUTION TO RETURN (%) MA MasterCard Incorporated Class A Provides credit card services DIS JPM Walt Disney Company JPMorgan Chase & Co. Owns and operates amusement parks, hotels, television stations and radio broadcasting stations Provides investment banking, financial services for consumers, small business and commercial banking, financial transaction processing, asset management and private equity ANTM Anthem, Inc. Provides life, hospital and medical insurance plans SCHW Charles Schwab Corporation Provides securities brokerage and other financial services MasterCard (and Visa) gained on the announcement that China plans to open its domestic card network to foreign companies. Walt Disney posted another strong quarter and raised its dividend by 15%. The outlook for earnings growth is quite positive as Disney leverages its content across its theme park, studio and consumer products businesses. JPMorgan Chase reported excellent first-quarter results that exceeded investor expectations. 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 security returns listed represent the period of when the security was held during the quarter. The portfolio information provided is based on the U.S. Flexible Equity SRI Fund. 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.

6 Quarter-to-Date Bottom Five Contributors to Return U.S. Flexible Equity SRI Fund Bottom Five Contributors CNI NAME Canadian National Railway Company DESCRIPTION AVERAGE WEIGHT (%) RETURN (%) CONTRIBUTION TO RETURN (%) Provides railroad transportation services CPA Copa Holdings, S.A. Class A Provides airline passenger and cargo services BBY Best Buy Co., Inc. Retails consumer electronics, entertainment software and appliances Engages in the retail sale of home improvement products LOW Lowe's Companies, Inc BRK.B Berkshire Hathaway Inc. Class B Provides insurance and investment services Long-term holding Canadian National Railway declined as investors focused on the near-term outlook for slower volume growth. Copa Holdings provided disappointing guidance with respect to its estimates for revenues and profits. Weaker results in Brazil surprised investors. The business potential of Best Buy is improving with a stronger offering to consumers, more solid financial condition and an improved cost structure. Nevertheless, the stock retreated after strong gains in prior periods. 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 security returns listed represent the period of when the security was held during the quarter. The portfolio information provided is based on the U.S. Flexible Equity SRI Fund. 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.

7 Quarter-to-Date Additions/Deletions There were no new holdings or eliminations in the quarter. We added to our existing investments in Copa Holdings, Priceline Group and United Rentals Inc., as price fluctuations provided opportunities. We trimmed Anthem Inc. after a meaningful increase in its share price. U.S. Flexible Equity SRI Fund Portfolio Activity ADDITIONS N/A SECTOR DELETIONS N/A SECTOR 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 the U.S. Flexible Equity SRI Fund 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.

8 Portfolio Characteristics U.S. FLEXIBLE EQUITY SRI FUND S&P 500 INDEX Number of Holdings Market Capitalization ($ B) Weighted Average Weighted Median Maximum Minimum P/E Ratio FY2 Est Earnings Growth 3-5 Yr. Est. (%) Dividend Yield (%) Top 10 Equity Holdings (%) Source: FactSet. The portfolio information provided is based on the U.S. Flexible Equity SRI Fund. 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.

9 Sector Diversification vs. S&P 500 Index As of 06/30/2015 Portfolio Allocation % CONSUMER DISC CONSUMER STAPLES ENERGY 21.2 FINANCIALS HEALTH CARE 15.4 INDUSTRIALS 27.9 INFO. TECH 19.7 MATERIALS TELECOM SERVICES UTILITIES U.S. Flexible Equity SRI Fund S&P 500 Index Source: FactSet. The portfolio information provided is based on the U.S. Flexible Equity SRI Fund 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.

10 Disclosure Performance data relates to the Brown Advisory U.S. Flexible Equity SRI Fund. The performance is net of management fees and operating expenses. Past performance may not be a reliable guide to future performance and you may not get back the amount invested. Changes in exchange rates may have an adverse effect on the value price or income of the product. The difference at any one time between the sale and repurchase price of units in the UCITS means that the investment should be viewed as medium to long term. This is not an invitation to subscribe and is by way of information only. Cancellation rights do not apply and UK regulatory complaints and compensation arrangements may not apply. This is not intended as investment advice. Investment decisions should not be made on the basis of this Review. You should read the Fund s prospectus in full to understand the features and risks associated with this Fund. The Fund s prospectus and Key Investor Information Document are available by calling or visiting the Fund website. The Brown Advisory U.S. Flexible Equity SRI Fund is authorised in Ireland as a UCITS pursuant to the European Communities (Undertakings for Collective Investment in Transferable Securities Regulations, 2011 as may be amended, supplemented or consolidated from time to time) and a recognised collective investment scheme for the purposes of section 264 of the Financial Services and Markets Act The Fund is managed by Brown Advisory LLC. 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. Portfolio information is based on the Brown Advisory U.S. Flexible Equity SRI Fund. The S&P 500 Index represents the large-cap segment of the U.S. equity markets and consists of approximately 500 leading companies in leading industries of the U.S. economy. Criteria evaluated include market capitalization, financial viability, liquidity, public float, sector representation and corporate structure. An index constituent must also be considered a U.S. company. Figures shown on sector diversification and quarterly attribution detail by sector slides may not total due to rounding.

11 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. 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.