306. The secrets to long term outperformance in US equities

Maneesh Bajaj, manager of the Brown Advisory US Flexible Equity fund, shares insights into the fund’s philosophy and flexible approach, attributing its long term success. We cover a whistle stop tour of US headlines including the Magnificent Seven, including both Microsoft and Alphabet, the growing role of artificial intelligence across industries, a US election year and two significant sectors for the portfolio: financials and healthcare.

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This fund has been run by Maneesh Bajaj since 2017. Its strategy is unconstrained, meaning Maneesh is free to select companies from across the market-cap spectrum. This has enabled the fund to become one of the few to regularly outperform the S&P 500 over long periods of time. Supported by a strong team of analysts, the Brown Advisory US Flexible Equity fund has delivered good returns in both up and down markets. A strong candidate for those looking for a core US equity fund.

What’s covered in this episode: 

  • The fund’s outperformance over 1, 5 and 10 years
  • The concentration of the US market
  • The long term investment case for Microsoft
  • The investment appeal of Alphabet
  • Managing the growth of artificial intelligence in the portfolio
  • Is AI the next dotcom bubble?
  • The fund’s largest weighting: financials
  • Growing opportunities in healthcare
  • What an election year means for the fund

21 March 2024 (pre-recorded 18 March 2024)

Below is a transcript of the episode, modified for your reading pleasure. Please check the corresponding audio before quoting in print, as it may contain small errors. Please remember we’ve been discussing individual companies to bring investing to life for you. It’s not a recommendation to buy or sell. The fund may or may not still hold these companies at your time of listening. For more information on the people and ideas in the episode, see the links at the bottom of the post.


Staci West (SW): Welcome back to the Investing on the go podcast brought to you by FundCalibre. We take a closer look at US equities – including the so-called Magnificent Seven – and what an election year might mean for the US stock market.

I’m Staci West and today I’m joined by Maneesh Bajaj, manager of the Brown Advisory US Flexible Equity fund. Maneesh, thanks for joining me today.

Maneesh Bajaj (MB): It’s great to be here with you.


SW: Now, this fund is celebrating it’s 10 year anniversary this month and it’s had excellent performance. It consistently beats the S&P 500 over 1, 5 and 10 years, which is not an easy thing to do over the long term – outperforming the S&P – so what’s your secret? What enables you to continue to outperform? What are the kind of companies driving this?

MB: So, there are confluence of factors at play here. The number one, the most important thing is our philosophy. The second is our approach to investing, which is flexible in nature. The third element I’d say is the talented team at Brown Advisory, which supports the strategy, and also the discipline we have related to how we go about investing.

SW: And the so-called Magnificent Seven has seen a lot of coverage and they make up something around 30% of the S&P market cap now, I believe. So, is the US market over-concentrated in your opinion?

MB: So, if you look at the headline and your assertion that the markets are concentrated, that seems like the right assertion where you have this group of 7-10 companies, which are nearly one third of the entire market capitalisation of the S&P 500. But we shouldn’t get carried away just with the headline. And in some ways, the market capitalisation of these companies is also a reflection of how big and how profitable these companies are. These companies are serving very large markets, global markets; they have a dominant share, they have high barriers to entry, and they have largely kept competition away. And these companies continue to prosper. They’re growing revenue, they’re growing earnings, and much faster than the market. So yes, these businesses have benefited both from growing their earnings as well as investors willing to pay up for these earnings. So, I hear you when you say that the markets are concentrated, they are, they’ve never been in this way ever, but they are for good reasons.

SW: And you own a few of these companies, I believe. So, can you tell me about one or two of them? What is their appeal, you know, aside from all the headlines?

MB: Sure. So, amongst the larger companies – and oftentimes they’re referred as a Magnificent Seven – we own five of the companies. Most of these holdings are very long-term holdings of ours. And Microsoft is an example. It is the largest software company that serves both enterprise and consumers. Microsoft is most well known for their Windows operating system, for their PCs and productivity software like Microsoft Word and Microsoft Excel, PowerPoint but their offerings are much wider. They’re into search, they’re in gaming, they’re in cloud computing. And with every technological shift, Microsoft has made itself only more relevant for their customers. They are very, very big in cloud computing. They have a full stack of hardware and software where customers can run their data centres on Microsoft’s cloud, so this is a company which has done really well over multiple decades, [with] their revenue of more than $200 billion, and they have profits, operating profits, of about $90 billion. So, which again, [is] very, very profitable. And recently Microsoft have been on the news; they have been investing massively behind AI with OpenAI, the investment in OpenAI, and as I said, that Microsoft has been a long-term holding of ours and done very, very well for our clients.

The second is Alphabet. And this is a company, again, we all know for its search, [it’s a] very, very dominant player in the search market. And it’s not only search – they have YouTube, they also have Gmail, they have also productivity software – again, a very large company with $340 billion in revenue generating a $100 billion of profitability. This is a business with strong moats [and they] continue to grow their earnings. These are two examples of the Magnificent Seven, which we own in our portfolio.

SW: And you mentioned Microsoft and AI, so let’s talk about AI for a little bit. How are you managing the growth of AI in the portfolio?

MB: Sure. So, the cool thing about AI is that its perks are not just limited to the big tech giants that are pumping out these fancy AI models like those massive language ones which we keep on hearing about. It’s also going to be a gold mine for companies sitting on a treasure trove of unique data. And if you think about companies like Adobe, UnitedHealth, Intuit, Uber, Progressive, which are held in our portfolio, all these companies have a rich deep pool of data, which they have been collecting for many years, and they’re just beginning to scratch the surface of what they can do with it.

So, we are going to see new services, we are going to see new products and many, many companies are going to benefit from this new technology. It’s like we are in a beginning of a whole new era and AI is a kind of a magic key, which will unlock all sorts of doors for different industries. So we’ll see how this space evolves, but we think that the portfolio is well-positioned as AI continues to get adopted and grow.

SW: Is AI throwing up more opportunities for different types of companies? I mean, some of the ones you mentioned aren’t necessarily tech companies, AI companies, as you said. So, are you seeing more opportunities to address the AI theme outside of direct tech?

MB: Yeah, so as I mentioned that we have companies that have tremendous amount of data and over time they will be able to adopt these AI models and leverage the data to come up with new offerings. There is a lot of excitement around AI, and AI is a word which is being thrown around quite a bit on these earnings calls. But I do think it’s early. I think, you know some have seen some analysis where 30-35% of the companies in the S&P 500, which are talking about AI on their quarterly calls, which has clearly jumped up from a few years ago. So, we’ll see how this space evolves, but certainly we expect many, many companies to be taking advantage of AI.

SW: And then I guess my last question on just AI is, do you think that AI is a bubble? Are we looking at the future AI-dotcom bubble situation?

MB: So there is tremendous amount of excitement around AI and there’s undoubtedly… generative AI is transformational and we’ve never seen computers being able to speak or talk or understand natural language and respond to natural language as they’re doing today. So undoubtedly a lot of money and attention is pouring into AI. We’ve seen Microsoft invest $10 billion or more than that in OpenAI. And companies that seem to be falling behind or the perception that companies are falling behind in AI are being punished by the market. So, undoubtedly there’s a lot of excitement. Now, in my view, it’s very difficult to know if you are in a bubble or not. And AI is very promising and if it delivers on the promise, then clearly we are not in a bubble. But if AI fails to deliver on the promise, then we would be in a bubble – but we will only know post the fact! So, time will tell whether we are in a bubble or not.

SW: And we’ve talked obviously about technology for a bit here and I was expecting more technology on your fact sheet actually when I had a look. So, your largest sector weighting is financials – tell me a bit more about that. What’s so attractive about financials in the US?

MB: So yes, we do have an overweight to financials now. By the way, our overweight in financials actually happened without us doing anything. And that was early part of 2023 when Mastercard and Visa were recategorised from technology companies to financials. And one day we woke up, all of a sudden the weights had changed in the portfolio and and we had a much higher weight in financials even though we had made no changes to the portfolio. It’s simply the S&P recategorisation of these two companies.

But even within financials we have a very, very diverse set of investments. I mentioned to you Visa and Mastercard. We also own Berkshire Hathaway, which is a very large company. And is Berkshire Hathaway a financial company? Is it an industrial company? Maybe even a tech company because they have such a sizeable holding of Apple. And here again, you know, we also have investments in banks. We have a company called First Citizens [Bancshares], which has been a phenomenal stock for us. We also have investments in alternatives, KKR and Blackstone. And we also have a wealth manager, Ameriprise [Financial]. So these are fantastic companies. They are different parts of the financial services sector and we feel very, very good about our investments. And most of these investments have done really well for us.

SW: And another big business in the US is healthcare. And again, you have about 13% of the fund in healthcare and when we spoke about a year ago, we talked about the potential for more effective radiology due to AI. So again, we talked about AI briefly already, but I’m just wondering, is that still where the fund is exposed on this technology side of healthcare or do you have pharmaceuticals or something else in there?

MB: Yeah, and here again, you know, we have been able to identify various companies with great business models, well-managed companies in different areas of the healthcare space. So we do have investments in managed care. These are insurance companies, companies like UnitedHealth and Elevance which are in the portfolio and have been in the portfolio for the long term. We also have, you mentioned pharmaceuticals – we have an investment in Merck and we also have investments in tools companies like Danaher, which is a recent investment, a phenomenal company and also Agilent [Technologies]. And then we have investments in some medical devices companies like Edwards Lifesciences, which continue to innovate and do very, very well.

SW: Do you see more opportunities in healthcare now compared to maybe when we spoke a year ago or a few years ago?

MB: So, the opportunity set keeps on evolving and we are constantly looking at new ideas and also evaluating the new ideas against what we already own. And oftentimes the companies we own are doing phenomenally well and so the bar of entry into the portfolio is very high. So, we always have a pipeline, we are always looking at names, and it’s only when it aligns well with our philosophy of finding great businesses at bargain prices, only then that’s when we make changes. And right now we feel very, very comfortable with the holdings we have. But as I said, Danaher is a new name in the portfolio, which we added in the last quarter.

SW: And I just wanted to wrap up with, it’s an election year in the US – I’ve got my international ballot ready – it’s still six plus months away as we’re recording, but do you find any difficulties in managing the portfolio during an election year or is it very much status quo, same?

MB: Yeah, so there’s always volatility and investors who, especially short term in nature, tend to move around their positions during an election cycle. But in my experience, you know, the US economy has continued to prosper despite who is the president or who is running the house of the Senate, so our bet really is on the long term on the US economy and we don’t generally rejig the portfolio based on an outcome of an election. My view is that the economy will continue to prosper over time and we don’t really overly focus on on the elections.

SW: Well, you said it yourself, you are looking at the companies and you want to hold them for the long term anyway, so hopefully they’re outliving any election cycle volatility.

MB: Well said. Yeah, that’s exactly right.

SW: Not to put words in your mouth! That’s brilliant Maneesh, thank you for talking to me today.

MB: Thank you, it was pleasure.

SW: This fund is unconstrained meaning the manager is free to select companies from across the market-cap spectrum. This has enabled the fund to become one of the few to regularly outperform the S&P 500 over long periods of time making it a strong candidate, in our opinion, for those looking for a core US equity fund. For more information on the Brown Advisory US Flexible Equity fund visit FundCalibre.com – and dont forget to subscribe to the Investing on the go podcast, available wherever you get your podcasts.

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