A global investment strategy focussed on top quality companies that offer exceptional services and/or products to their customers can deliver consistently high returns and provide protection against market downturns.
“These companies are typically highly profitable, achieve a high return on invested capital (ROIC) and generate substantial cash flow,” said Susanne Linhardt, investment director at Brown Advisory.
The Brown Advisory Global Leaders Strategy managers, Mick Dillon and Bertie Thomson and their team, use franchise quality, management ability, quantitative measures and investability to identify a global leader.
“All investments need to pass these four tests to enter the portfolio,” said Linhardt (pictured). “The focus is valuations and quality, rather than momentum and popular themes.”
The rigorous bottom-up analysis creates a concentrated portfolio of 30-40 stocks and allocations are made with a long-term perspective.
The investment team conducts scenario analysis for each potential stock in addition to examining its current key metrics to predict its likely return over the next five years. The minimum hurdle rate is 10% annualised – with a minimum 10% discount rate – which translates into doubling of the investment by year seven.
“The managers implement a disciplined and repeatable two-stage investment process, that integrates investment selection with regular reviews,” Linhardt said.
Capital allocation
Capital allocation principles have been central to the review component of the investment process since 2015. These combine an internal rate of return (IRR) based approach that estimates payoffs versus probabilities and valuation derived from expected base case IRRs, portfolio risk analysis and, importantly, behavioural reviews.
The investment team places strong emphasis on self-improvement and self-reflection. “Behavioural reviews allow the managers to review their trade history and logs regularly with an external ‘coach’ to check for behavioural tendencies, such as loss aversion (or the endowment effect), to raise any issues of concern,” said Linhardt.
“With almost a decade’s worth of data, we are able to track and quantify how these behavioural reviews have added value and alpha for investors.”
Stock selection
The emphasis on individual stocks means the strategy is sector, country and style agnostic which leads to a naturally diversified portfolio containing cyclical, defensive and growth stocks. This in turn creates a resilient portfolio that outperforms in rising markets yet also has strong downside capture.
The portfolio combines offensive as well as defensive characteristics. Since 2015, it has achieved 105.8% upside capture and 95.6% downside capture, according to Factset.
Its annualised net return of 12.1% since inception to 1 May 2025 is three percentage points higher than the MSCI ACWI index net return, yet risk-adjusted return metrics, such as the Sharpe and Treynor ratios, are among the top nine percent of the strategy’s peers, eVestment data shows.
“Notably, the strategy outperformed during significant market drawdowns not just in the first four months of this year, but also during the Covid-induced market sell-off in the first quarter of 2020,” said Linhardt.
Portfolio management
About one third of the strategy’s portfolio is currently invested in financials, but rather than conventional banks, its weighting is largely to providers of financial markets infrastructure such as Deutsche Boerse and London Stock Exchange Group, payment processers such as Visa and cash-rich micro-lenders such as PT Bank Rakyat Indonesia.
The exchanges, for instance, have strong competitive advantages, have little risk and generate a high return on capital. “They have performed especially well during the past few months as traders and investors have used them extensively to hedge positions and portfolios,” said Linhardt.
Emerging markets holdings, such as B3 in Brazil, have also done well due to strong operating performance but also a positive impact on share prices as investors have retreated from the US dollar. The strategy typically has emerging markets exposure of about 10%, and that commitment has boosted its performance this year, according to Linhardt.
“Although we’re long-term investors, the strategy is not simply buy-and-hold. We trim positions as they become over-valued, sell them when the investment case deteriorates and add positions when our conviction rises more,” she added.
“Dispersion creates opportunity, and we have a list of around 20 companies that we’ll buy at the right price.”
However, the quality of the business that the strategy invests in, and the disciplined process means that the managers stay calm even in the most volatile markets.
“Certainly, when major events happen, such as tariffs, or as negative economic trends emerge, such as recession, then we update our assumptions and recalibrate risk,” said Linhardt.
However, as always, the strategy focuses on franchise strength, management quality, ROIC and cash flow and looks to purchase companies that are undervalued by the market.
