Fund Highlight: BBH Core Select Fund (BBTEX)
BBH Core Select Fund (BBTEX) isn’t a terribly exciting fund, but it isn’t meant to be. It invests the way most individuals would if they had the time, investment knowledge, and motivation to do so on their own. The truth is, however, that many people don’t have the time, knowledge or motivation to invest on their own—which makes the existence of an easy-to-understand fund like BBH Core Select a very good thing.
Although many prospectuses are long on legalese and short of specifics, the prospectus for this fund hews closely to the way managers Michael Keller and Tim Hartch describe their investing process (Richard Witmer is listed as a third manager, but he was not present at a recent phone interview). The fund’s goal is long-term growth of capital with an emphasis on tax efficiency.
When examining companies, the management team looks for “established, cash generative businesses that are leading providers of essential products and services.” The fund’s web site goes into much greater detail on its description, but a shortened version boils down to something like this: The managers started with a broad pool of large companies and pulled out those that provide essential products and services, have loyal customers, leadership positions, sustainable competitive advantages, management teams with solid operating histories and high levels of integrity, meaningful insider ownership, strong balance sheets, generate ample free cash flow, and have high returns on capital. The research team digs into financial documents, talks to customers and competitors, and holds meetings with companies when making an evaluation. This long list of favored attributes cuts down the pool of investment candidates to somewhere between 100 and 150.
The team remains on the lookout for companies to add to the pool, as well as those that no longer merit inclusion in the list of investment candidates, but, over time, the list of companies it will consider remains fairly constant according to Keller and Hartch. The difference between being on the list of candidates and being in the portfolio boils down to the last consideration: margin of safety. The managers create an intrinsic value estimate for the companies they follow. When the market value of a company is far enough below the intrinsic value, the managers consider it for inclusion in the portfolio.
Once in the fund, the goal is to hold a company for three to five years. This is one of the factors behind the fund’s relatively low turnover. That said, nothing lives in the portfolio unquestioned, and when a company’s stock appreciates toward the intrinsic value estimate for the company, it is trimmed and often sold entirely when it reaches the estimate. The managers will also sell a stock when something fundamental changes. Moreover, they aren’t afraid of decisive action on both the purchase and sell sides of the equation. A good example of this was the team’s 2006 move out of banks, which it viewed as too risky based on fundamental issues—although, in hindsight, that decision looks prescient. However, it caused some to question this maneuver at the time.
The fund is a non-diversified offering, meaning, in this case, that it holds a relatively small number of stocks (20 to 30) at any one time. The portfolio will often be heavily concentrated in the largest positions, with 40% to 45% of assets in the top 10 holdings not an uncommon weighting. This focus, from the managers’ perspective, is a good thing, as it allows them to invest in the ideas about which they have the most conviction. The fund also has the freedom to invest in foreign companies; most companies on the managers’ list are best considered multinationals, however, so this fact is almost a non-issue except for the most risk averse, or asset allocation purists.
The fund is in the top 5% of Value Line’s Growth objective group over the trailing three and five years through September. It also handily outperformed similar funds when the stock market was reeling in 2008. That said, the fund’s more staid approach can leave it at a disadvantage in bull markets, particularly ones that are overextended—though bubbles are often only clear in hindsight. For more conservative investors who have a clear understanding of the managerial approach, this fund could easily be the core stock holding. It could also serve as the large-cap component for a more broadly diversified portfolio.
At the time of this article's writing, the author did not have positions in any of the companies mentioned.