- Purchase businesses at a discount to their intrinsic valuesX
Intrinsic Value
BBH's estimate of the present value of the cash that a business can generate and distribute to shareholders over its remaining life.
See More Definitions
- Use a valuation approach based on long-term forecasts
- Apply a trim/sell discipline that is valuation sensitive
Strategy Objectives
Our Mid Cap Equity Strategy seeks to provide investors with long-term capital growth by generating strong absolute returns and outperforming over full economic cycles.
How we do our work is just as important as what we do.
We invest in a select number of high-quality mid-cap business franchises, as guided by the four pillars of our investment strategy:
- Business quality
- Financial returns
- Management
- Growth potential
We seek to establish a margin of safety for equity by investing at an attractive discount to our estimate of intrinsic value.1
A Disciplined Long-Term Equity Strategy
- Aim to invest in companies that generate attractive net earnings and free cash flow per share growth, both on an absolute basis and relative to the broader market
- Perform extensive due diligence and holistic analyses incorporating industry dynamics, key competitors, customers, and suppliers
- Seek companies that structurally offer high returns on capital and impressive economic profit growth
- Purchase shares that are trading at attractive valuations and at reasonable discounts to our base case estimate of intrinsic value, all on both an absolute basis and relative to their benchmark
Key Investment Goals
- Our foundation is based on the premise that higher than average return on capital and free cash flow per share growth leads to strong absolute and relative economic value creation
- Provide long-term growth of capital and generate attractive absolute and relative returns over full economic cycles.
- Reduce likelihood of permanent loss of capital on any single investment, by investing in companies with the fundamentals to manage downside risk
Investment Principles
A thoughtful, consultative approach that prioritizes long-term value over short-term thinking
- Concentrated holdings; portfolio construction is sector and benchmark agnostic
- Primary due diligence incorporating deep fundamental analysis
- Investment team of generalists, leveraging diverse backgrounds
- Seek to invest in outstanding businesses that can grow their intrinsic value materially over time
- Willing to own companies for many years, through all parts of an economic cycle
- Ongoing company engagement deepens our insights over time
- Focus on cash-generative businesses that provide essential products and services, and can prosper in varying economic conditions
- Identify and analyze material ESG-related considerations
- Demand a dual-faceted margin of safety that seeks to mitigate both business risks and price risks
- Adhere to strict investment criteria
- Seek to avoid low probability, high severity risks
- Exploit divergences between market prices and underlying intrinsic values
Very few companies meet our investment criteria, but those that do have the potential to compound returns over many years.
Investment Process
- Investment Process
- Investment Criteria
- Valuation Discipline
- Risk Management
Deep Fundamental Research
Primary due diligence and deep fundamental analysis are at the core of our investment process. We emphasize high levels of engagement with our portfolio company management teams and other industry participants, such as competitors, suppliers, and customers; as well as extensive research throughout the investment life cycle. The result is deeper insight into a company’s strategy, competitive positioning, value chain, and durability, as well as its risks and opportunities, which include material environmental, social, and governance (ESG) factors.
We seek to purchase investments at discounts to our estimates of a business’s intrinsic value. Our valuations contemplate the full life cycle cash flow generation capability of each company, they are not based on short-term estimates or thematic predictions. Our goal is to establish and maintain a margin of safety for each investment and the overall portfolio.
Our estimates of intrinsic value are:
- Based on proprietary estimates of future cash flows and economic profits
- Focused on long-term capital requirements and marginal returns
- Modulated for various upside and downside cases
- Regularly reviewed and updated
Buy Discipline:
- Initiate a position if:
- Company is a strong fit with investment criteria
- Due diligence is completed
- Stock is trading at a discount to intrinsic value
- Company is a strong fit with investment criteria
- Consider additional purchases when appropriate
Sell Discipline:
- Sell/trim a position based on:
- Convergence of market price with intrinsic value
- Position size relative to risk/reward assessment
- Emergence of a more compelling investment opportunity
- Deterioration of fundamentals or criteria fit
- Convergence of market price with intrinsic value
We define risk as the likelihood of sustaining a permanent capital loss on any investment rather than equating it with market volatility.
The Margin of Safety concept is a key part of our risk management approach, and we believe it has two critical components that must exist in tandem:
- Business Risk Mitigation – Focus on businesses with resilient financial and fundamental characteristics that enable them to manage through periods of economic or market stress, and well-managed risks, including environmental, social, and governance (ESG) factors.2
- Price Risk Mitigation – Purchases are made at levels we believe to be attractive against our estimate of intrinsic value, both on absolute terms and relative to the market. Positions are adjusted based off our assessment of market expectations, position size relative to the overall portfolio, and/or valuation.
We believe the best ideas emerge from the balance of a collegial and challenging culture. Our team-based investment process values everyone’s unique expertise and input.
What Makes Us Different?
How it’s done matters.
- Our deep fundamental and actionable research is not predicated on making macroeconomic projections.
- Extensive industry and company due diligence form the foundation of our investment process.
- We foster independent thinking and innovate every day for the long term.
- We deliver excellence with humility and act with unwavering integrity.
We are value-oriented, but also expect our portfolio companies to grow and reinvest capital at value-accretive rates of return.
How to Invest
Our Mid Cap Strategy can be accessed through a variety of investment vehicles. To learn more please contact a member of our institutional relationship management team.
Visit the BBH Funds website for more information about our public fund offerings.
1 Intrinsic value is an estimate of the present value of the cash that a business can generate over its remaining life.
2 A less favorable ESG profile may not preclude a manager from investing in a company, as the consideration of ESG factors is not more influential than the consideration of other investment criteria
A less favorable ESG profile may not preclude the Adviser from investing in a company, as the consideration of ESG factors is not more influential than the consideration of other investment criteria. Considering ESG factors as part of investment decisions may result in the Adviser forgoing otherwise attractive opportunities, which may result in lower performance when compared to advisers that do not consider ESG factors.
This communication is for informational purposes only and does not constitute an offer or a solicitation to buy or sell any particular security or to adopt any specific investment strategy. The information herein has not been based on a consideration of any individual investor’s circumstances and is not investment advice, nor should it be construed in any way as tax, accounting, legal or regulatory advice. Any views and opinions are subject to change at any time.
Strategies are shown without regard to whether they are offered as separately managed account mandates or through pooled vehicles. Any discussion of or reference to any given strategy herein should not be taken as a recommendation or solicitation of any pooled vehicle which has an investment objective featuring or similar to such strategy.
This material does not constitute an offer or solicitation in any jurisdiction where or to any person to whom it would be unauthorized or unlawful to do so.
Risks
There is no assurance that a portfolio will achieve its investment objective or that the strategy will work under all market conditions. Each investor should evaluate their ability to invest for the long-term, especially during periods of downturn in the market.
The value of the portfolio can be affected by changes in interest rates, general market conditions and other political, social and economic developments.
The portfolio may assume large positions in a small number of issuers which can increase the potential for greater price fluctuation.
Investing in small or medium sized companies typically exhibit greater risk and higher volatility than larger, more established companies.
Investment Advisory Products and Services:
NOT FDIC INSURED NO BANK GUARANTEE MAY LOSE VALUE
