BBH U.S. Large Cap Equity - Core Select Quarterly Strategy Update

BBH U.S. Large Cap Equity - Core Select Quarterly Strategy Update – Q4 2024

December 31, 2024

Scott Hill

Portfolio Manager, Scott Hill, provides an analysis of the investment environment and most recent quarter-end results of the BBH U.S. Large Cap Equity - Core Select strategy.

Highlights

During fourth quarter 2024, most portfolio companies in the BBH U.S. Large Cap Equity - Core Select Strategy* (the Strategy) reported third quarter 2024 results and provided near- and longer-term guidance.

◦ The financial results of the portfolio companies in the Strategy were strong on an absolute basis and compared favorably to the benchmark S&P 500 Index (the Index).

◦ We would characterize forward guidance by the portfolio companies in the Strategy as increasingly cautiously near term and highly confident medium to longer term.
During the quarter, while market breadth significantly increased beyond mega-cap technology companies, stock price performance was heavily influenced by returns of lower-quality companies (both deeper value and less profitable hyper-growth index constituents), as easing by central banks and other stimulus fed an appetite of increased risk.
On a total return basis, the Strategy lost 1.64% (gross) and 1.89% (net) in fourth quarter 2024, while the Index increased 2.41%. The largest detractor to performance within both the Strategy and Index was the broader healthcare sector, which underperformed by ~12.5%.
We remain pleased with the year-to-date fundamental performance of our portfolio, which has been strong on both an absolute and relative basis, continuing trends we have seen for some time. Fundamental performance driving economic value creation remains very favorable for the strategy on an absolute basis and relative to the Index, as does relative valuation, against a backdrop of very full absolute valuation level.
While we view the next few months with caution, it’s the strong fundamental performance and superior valuation of our portfolio companies that we are most pleased about. This is the source and driver of our conviction in the long-term return potential for our clients.

Market Overview

During fourth quarter 2024, most companies in the Index reported third quarter 2024 results and provided near- and longer-term guidance. Companies in the Index combined to report mixed results in third quarter 2024, with strong growth in earnings contrasting with more modest results in free cash flow generation. Through the third quarter, net earnings per share (EPS) of the companies in the Index grew a healthy 8.3%; however, free cash flow per share growth for the Index was a more pedestrian 4.3%. Relative to near-term expectations, if fourth quarter consensus is met, earnings for 2024 for the Index would finish the year up ~8.0% and free cash flow to equity would be down ~0.8%

The largest detractor (-117 basis points [bps])¹to total return was the broader healthcare sector, which investors shunned in favor of high-growth tech stocks. Election uncertainties, created by Robert F. Kennedy Jr.’s nomination to head the Department of Health and Humans Services (HHS), as well as generally weak earnings, weighed heavily on the sector at the end of last year and could continue to cause volatility in the near term.

During the quarter, Index returns were heavily influenced by the outsized stock price performance of lower quality companies (both deeper value and less profitable hyper-growth Index constituents), as easing by central banks and other stimulus fed an appetite of increased risk. These stimulative actions were deemed to disproportionately benefit companies that are a poor fit with our investment criteria and ones we seek to avoid, both by the strategic design of our investment criteria and its diligent implementation, in our effort to produce durable absolute and relative returns over the long term and fundamentally outperform during periods of economic or market stress.

Specifically, within the Index, companies in the lowest-quality quintile of operating margin, return on equity and net income, and free cash flow growth have materially outperformed those in higher-quality cohorts of each metric. These have combined to produce a non-quality rally that has few, if any, true parallels and that some would suggest is indicative of extreme risk-taking.

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Exhibit 1: Chart depicting the cumulative performance of companies by free cash flow, positive or negative, from September 18, 2024, to November 29, 2024. Companies in the lowest-quality quintile of free cash flow growth materially outperformed those in the higher-quality quintile.

Exhibit 2: Chart depicting the cumulative performance of companies by operating margin from September 18, 2024, to November 29, 2024. Companies in the lowest-quality quintile of operating margin materially outperformed those in the higher-quality quintile.

Regardless of the mixed and rather subdued outlook provided by reporting companies, the Index continued to build on its incredibly robust stock price performance over the past 18 months: The S&P 500 posted a further gain of 2.41% during fourth quarter 2024 to end the year up almost 25%. The strong stock price performance of the Index was led by four sectors: consumer discretionary (+14.3%) led the way, with communication services (+8.9%), financials (+7.1%), and information technology (+4.8%) rounding out the positive contributors. In aggregate, these sectors contributed approximately 450 bps on an absolute basis to total return. Lower levels of concentration and a meaningful rotation away from high-quality growth companies were the key themes during the past three months.

Portfolio commentary

During fourth quarter 2024, most portfolio companies in the Strategy reported third quarter 2024 results and provided near- and longer-term guidance. The financial results of the portfolio companies in the Strategy were strong on an absolute basis, with net earnings and free cash flow per share growing 17.0% and 14.3%, respectively, during the first nine months of the year. This compared very favorably to the fundamental performance of the Index, where net earnings and free cash flow per share increased 8.3% and 4.3%, respectively, continuing a multi-year period of fundamental outperformance. To that end, our portfolio companies have executed well and have produced solid growth and fundamental economic performance while maintaining appropriately conservative capital structures. These achievements are evident at the aggregate portfolio level, where we have observed attractive growth in revenue, cash flow, and earnings, superior profit margins, returns on capital, and healthy balance sheets.

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CALENDAR YEAR ENDING 2023
Free cash flow per share	2024 / Q3 YTD	1 y-o-y	3 yr. CAGR	4 yr. CAGR	5 yr. CAGR
Strategy	14.3%	21.3%	10.9%	12.9%	10.4%
S&P 500	4.3%	-3.1%	5.2%	5.7%	5.1%
S&P 500 equal weighted	5.7%	6.0%	5.2%	4.8%	6.0%

Net earnings per share	2024 / Q3 YTD	1 y-o-y	3 yr. CAGR	4 yr. CAGR	5 yr. CAGR
Strategy	17.0%	16.4%	15.6%	15.0%	11.5%
S&P 500	8.3%	-1.4%	16.7%	8.0%	6.7%
S&P 500 equal weighted	2.5%	1.9%	22.8%	8.1%	7.6%

Past performance does not guarantee future results.

We have and will continue to trim and sell portfolio companies when valuations increase to levels we believe to be in excess of the range of reasonable economic outcomes implied by current stock prices. Conversely, we may add new portfolio companies that meet our investment criteria and may add to existing portfolio company positions when valuations are at levels we believe to be attractive in light of the range of reasonable economic outcomes implied by current stock prices. While we remain focused on finding new investments that meet our investment criteria and are attractively valued, we do so in the context of a market environment we view as challenged, with risks evident on many fronts.

Over any period of time, stock prices reflect the confluence of many factors as well as the perspectives of myriad other investors, both active and passive, that do not share our perspectives on risk, fundamental economic value creation, or how to properly measure it. Regardless of these other views, over the long term, we believe that it is a reasonable and an economically sound premise that the price of stocks should follow their growth in free cash flow per share and that attractive valuations support economic upside and mitigate risk. Consequently, that will remain our focus as we seek to deliver both strong absolute and relative after-tax returns over the long term.

Portfolio activity

During the quarter, we made several portfolio rebalancing trades reflective of relative valuation opportunities, risk, and fit with our investment criteria. Turnover during the quarter was just above 2%, reflecting our caution with high market expectations and valuations at a very full level.

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HOLDINGS (AS OF DECEMBER 31, 2024)
Holding	Sector	Weight	Holding	Sector	Weight
Microsoft	Technology	6.80%	S&P Global	Financials	2.00%
Apple	Technology	6.20%	PepsiCo	Consumer staples	2.00%
Alphabet	Communication services	5.50%	Analog Devices	Technology	2.00%
Amazon	Consumer discretionary	5.00%	Cadence Design Systems	Technology	2.00%
Nvidia	Technology	5.00%	Booking Holdings	Consumer discretionary	2.00%
Adobe	Technology	4.20%	McDonald's	Consumer discretionary	2.00%
Nike	Consumer discretionary	3.80%	Alcon	Health care	1.90%
WM	Industrials	3.30%	Thermo Fisher Scientific	Health care	1.90%
Oracle	Technology	3.20%	Zoetis	Health care	1.80%
Automatic Data Processing	Industrials	2.80%	Progressive	Financials	1.80%
KLA Corp	Technology	2.75%	Abbott Labs	Health care	1.75%
Visa	Financials	2.65%	BlackRock	Financials	1.50%
Applied Materials	Technology	2.60%	UnitedHealth Group	Health care	1.50%
Mastercard	Financials	2.55%	Arthur J. Gallagher	Financials	1.50%
Otis	Industrials	2.30%	Moody's	Financials	1.35%
Linde	Materials	2.30%	Eli Lilly	Health care	1.25%
Texas Instruments	Technology	2.25%	Johnson & Johnson	Health care	0.80%
Costco	Consumer staples	2.20%	Novo Nordisk	Health care	0.50%
Proctor & Gamble	Consumer staples	2.05%	Deere & Company	Industrials	0.50%
Berkshire Hathaway	Financials	2.00%	Lockheed Martin	Industrials	0.50%

Holdings are subject to change. Holdings are of the Model portfolio.

Despite near-term caution, we believe we will continue to make good progress on our portfolio transition efforts. Within both the Core Select Transition and Core Select Accelerated transition paths, we trimmed positions in Berkshire Hathaway, Progressive, and Booking Holdings, based on strength in performance and to manage overall portfolio balance and weightings. Applied Materials, a company we have a high degree of conviction and confidence in with their long-term outlook, experienced continued share price weakness, which gave us the opportunity to add to our position. However, these efforts remain disciplined and serve as longer-term paths forward that require patience.

Outlook

At the end of fourth quarter 2024, we held positions in 40 companies with the ten largest holdings accounting for 49% of total assets. The Strategy was trading at ~99% of our underlying estimate of intrinsic value, which compares to ~114% for the Index.

In our view, today’s market environment warrants caution. Current valuations are full to overflowing on most traditional metrics, as well as our preferred intrinsic value methodology. In addition, current market expectations for growth appear robust to us: Consensus expectations for earnings growth for the Index are approximately 15% for 2025. While these estimates are plausible, they are high relative to both recent levels of performance and longer-term normalized rates of growth. While we remained focused on finding new investments that meet our investment criteria, we will do so in the context of a market environment we view as challenged.

To conclude, our portfolio companies have executed well and have produced solid growth and fundamental economic performance while maintaining appropriately conservative capital structures. Given the near- and longer-term outlooks provided by the companies in the Strategy, we are optimistic that these strong trends will continue and that the differentiated financial attributes will be better recognized by other investors in the future, improving the stock price performance of the Fund relative to the Index over time.

Thank you for your interest in the BBH U.S. Large Cap Equity - Core Select strategy. Please reach out if you have any questions.

BBH Large Cap Equity Team

Hayley Xuereb, Chris Stonerook, Anurag Dhanwantri, Eric Yeh, Mark Weber, Rohit Mitter, and Scott Hill.

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PERFORMANCE (AS OF DECEMBER 31, 2024)
	Total returns		Average annual total returns
Composite/benchmark	3 mo.	YTD	1 yr.	3 yr.	5 yr.	10 yr.	Since inception
BBH U.S Large Cap Equity - Core Select (gross of fees)	-1.64%	20.18%	20.18%	6.13%	11.74%	10.61%	10.83%
BBH U.S Large Cap Equity - Core Select (net of fees)	-1.89%	19.00%	19.00%	5.08%	10.64%	9.52%	9.74%
S&P 500 Total Return Index	2.41%	25.02%	25.02%	8.94%	14.53%	13.10%	10.62%

Inception date: 10/1/2005

Returns of less than one year are not annualized.

Past performance does not guarantee future results.

The S&P 500 is an unmanaged weighted index of 500 stocks providing a broad indicator of stock price movements. The composition of the index is materially different than the Fund’s holdings. The index is not available for direct investment.

Sources: BBH & Co. and S&P

Scott Hill

Principal, Portfolio Manager

Capital Partners

New York City, NY | USA

* Formerly called U.S. Large Capital Equity Strategy.

¹Basis point (bp) is a unit that is equal to 1/100th of 1% and is used to denote the change in price or yield of a financial instrument.

RISKS

There can be no assurance the Strategy will achieve its investment objectives.

Investors should be able to withstand short-term fluctuations in the equity markets and fixed income marketsin return for potentially higher returns over the long term. The value of portfolios changes every day and can beaffected by changes in interest rates, general market conditions and other political, social and economic developments.

The Strategy and may assume large positions in a small number of issuers which can increase the potential forgreater price fluctuation.

International investing involves special risks including currency risk, increased volatility, political risks, and differencesin auditing and other financial standards.

Gross of fee performance does not reflect the deduction of investment advisory fees. Net of fees performanceresults reflect the deduction of the maximum investment advisory fees. Returns include all dividends and interest,other income, realized and unrealized gain, are net of all brokerage commissions and execution costs. Performancecalculated in U.S. dollars.

Brown Brothers Harriman Investment Management (“IM”) claims compliance with the Global Investment PerformanceStandards (GIPS®). GIPS® is a registered trademark of CFA Institute. CFA Institute does not endorse orpromote this organization, nor does it warrant the accuracy or quality of the content contained herein. To receiveadditional information regarding IM, including a GIPS Composite Report for the strategy, contact John Ackler at212-493-8247 or via email at john.ackler@bbh.com.

Brown Brothers Harriman & Co. (“BBH”) may be used as a generic term to reference the company as a whole and/or its various subsidiaries generally.This material and any products or services may be issued or provided in multiple jurisdictions by duly authorized and regulated subsidiaries.This material is for general information and reference purposes only and does not constitute legal, tax or investment advice and is not intended asan offer to sell, or a solicitation to buy securities, services or investment products. Any reference to tax matters is not intended to be used, and maynot be used, for purposes of avoiding penalties under the U.S. Internal Revenue Code, or other applicable tax regimes, or for promotion, marketingor recommendation to third parties. All information has been obtained from sources believed to be reliable, but accuracy is not guaranteed, andreliance should not be placed on the information presented. This material may not be reproduced, copied or transmitted, or any of the contentdisclosed to third parties, without the permission of BBH. All trademarks and service marks included are the property of BBH or their respectiveowners. © Brown Brothers Harriman & Co. 2025. All rights reserved.

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