BBH Core Select – A Value Fund With A Long-Term Success Record
April 5, 2016
by Robert Huebscher
Corsair Capital, the event-driven long-short equity hedge fund, gained 6.6% net during the second quarter, bringing its year-to-date performance to 17.5%. Q2 2021 hedge fund letters, conferences and more According to a copy of the hedge fund's second-quarter letter to investors, a copy of which of ValueWalk has been able to review, the largest contributor Read More
Tim Hartch has been a co-manager of the BBH Global Core Select fund (BBGRX) since inception. He has also co-managed the BBH Core Select fund (BBTEX) since October 2005 and an investment partnership that invests in a select number of small- and mid-cap providers of essential products and services since 2001. Mr. Hartch joined Brown Brothers Harriman & Co. in 1996 and became a partner of the firm in 2010. He received an A.B. from Harvard University, where he was elected to Phi Beta Kappa. He also received an M.B.A. and J.D. from the University of Michigan.
I spoke to Tim on March 29.
We last spoke in 2011. Let’s start by briefly reviewing the history of the BBH Core Select fund and its core investment principles. Also, please tell us a little about the BBH Global Core Select fund, which you introduced three years ago yesterday.
The current team took over management of the BBH Core Select fund in October 2005, so we have been managing it for about ten and a half years. It’s a buy-and-own approach, focusing on high-quality businesses that are trading at a discount to proprietary intrinsic value estimates. We aim to achieve attractive returns and protect capital in down markets and outperform on a relative basis over time. We have historically outperformed in most down markets, such as the 2008 time period, while participating in up markets. We have trailed the S&P 500 the last two years, but we are pleased with how the businesses we own are performing at an operating level.
Our focus is on identifying high-quality businesses. We look for companies that have a loyal customer base, provide essential products and services, have a strong competitive position, operate in an attractive industry structure, have high returns on capital and a good balance sheet and offer an opportunity to partner with good management. We view ourselves as owners as opposed to traders. We try to select businesses and get our returns from the cash flows and the success of the underlying business.
Our Global strategy uses the same investment criteria and process as Core Select with the main difference being that it owns more international companies. We are very pleased with the quality of the companies we’ve been able to invest in outside the U.S. From a performance perspective, the Global results have been consistent with Core Select – generally outperforming in down markets.
Your investing style relies on a determination of the intrinsic value of a company. How has your calculation of intrinsic value changed as a result of Fed policy over the last seven years, and has monetary policy affected the criteria you use for buying or selling companies?
The changes in Fed policy have not had a big impact on our investment process. We still insist on equity returns of 8% to 11%, depending on the characteristics. The cost of debt that we use in our valuation models has probably come down, but we have a minimum return that we don’t go below. Accordingly, the discount rates we use have not changed much as a result of the near-zero interest rate policies.
It’s critical to recognize that Federal Reserve policies and those of other central banks around the world are distorting the real economy and the financial markets and have pushed valuations up across the board. It’s made it harder to buy businesses at a large discount to intrinsic value.
Where you see this effect the greatest is in the search for yield and in its effect on fixed income investors, as well on income-oriented equity securities whose yields have been pushed down. Returns have been pushed down to historically low levels.
In the previous question, you asked about our global fund. In Europe and Asia, similar policies have been followed by the European central banks, and in Japan it’s been even more aggressive. In my opinion, the effects of those policies have been negative and won’t solve the problems they are supposed to address. Negative rates are particularly painful for banks in those countries, and I hope the Federal Reserve doesn’t implement negative rates here.
In the Core Select Fund, you own the voting class shares of Berkshire Hathaway and Comcast but not Alphabet. Are those voting rights properly valued, and how do they factor into your investment decision?
The voting rights are not a huge factor in our investment decision. We select a share class based on liquidity and spread between voting and non-voting classes. The key for those three companies is that we have a family or a group of individuals that control the company. In all three cases, as well as Discovery – another company we own with two share classes – the controlling shareholders have a great track record of capital allocation, and they want to build the company over the long-term.
We are not trying to change control of these businesses. The economic interests are the same for the different share classes. It really comes down to liquidity and how large a spread there is between the share classes. In some cases, we have chosen to buy the non-voting share classes.