Maneesh Bajaj, manager of the Brown Advisory US Flexible Equity fund, shares his insights into the fund’s philosophy and flexible approach as the fund reaches its 10 year anniversary. We hear about the Magnificent Seven, the growing role of artificial intelligence across industries, the upcoming US election, and two significant sectors for the portfolio: financials and healthcare.
Why you should listen to the interview: With a broad universe as his opportunity set, Maneesh’s focus on healthcare and financials is a unique differentiator for a market dominated by technology. And despite holding five of the ‘Magnificent Seven’ the sector only accounts for 18% of the portfolio*.
This interview was recorded on 18 March 2024. Please note, answers are edited and condensed for clarity. To gain a fuller understanding and clearer context, please listen to the full interview.
Highlights in this interview:
Is the US market over-concentrated?
“If you look at the headline 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. 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 when I hear that the markets are concentrated, they are, they’ve never been in this way ever, but they are for good reasons.”
Data will drive AI innovation
“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 the large language models. It’s also going to be a gold mine for companies sitting on a treasure trove of unique data. Think about companies like Adobe, UnitedHealth, Intuit, Uber, Progressive, all of 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. Over time they will be able to adopt these AI models and leverage the data to come up with new offerings.
“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 kind of a magic key, which will unlock all sorts of doors for different industries. We will see how this space evolves, but certainly we expect many, many companies to be taking advantage of AI. And we think that the portfolio is well-positioned as AI continues to get adopted and grow.”
What’s in a name?
“Within financials we have a very, very diverse set of investments, for example, Visa and Mastercard, we also own Berkshire Hathaway, which is a very large company. Is Berkshire Hathaway a financial company or is it an industrial company? Or maybe even a tech company because they have such a sizeable holding of Apple. 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. These are all fantastic companies in 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.”
An evolving opportunity set
“In the healthcare sector, we have been able to identify various companies with great business models, well-managed companies in different areas of the healthcare space. For example, we have investments in managed care. These are insurance companies like UnitedHealth and Elevance which are in the portfolio and have been in the portfolio for the long term. We also have an investment in Merck and 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.
“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 all aligns with our philosophy of finding great businesses at bargain prices, only then will we make changes. And right now we feel very, very comfortable with the holdings we have.”
Conclusion
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.
*Source: fund factsheet, 29 February 2024
Main image: nico-smit-Q1tAFjL34C4-unsplash
