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Equities Fixed Income External Managers Private Equity and Real Estate Sustainable Investing

Equities

We follow a philosophy that low-turnover, concentrated portfolios derived from sound bottom-up fundamental research provide an opportunity for attractive performance results over time. We have a culture and firm equity ownership structure that help us attract and retain professionals who share those beliefs, and we follow a repeatable investment process that helps us stay true to our philosophy.

Brown Advisory Equity Strategies

Fixed Income

We follow a philosophy that fixed income strategies built from a foundation of stability coupled with fundamental credit research can seek to generate alpha and control risk. We have a culture and firm equity ownership structure that attract and retain professionals who share those beliefs, and we follow a repeatable investment process that helps us stay true to our philosophy.

Brown Advisory Fixed Income Strategies

External Managers

Investment Solutions Group

The Investment Solutions Group is an investment-management team within Brown Advisory that specializes in asset allocation, manager selection, hedge funds and other alternative investment strategies. Dedicated to open-architecture solutions, our team has established a strong track record of identifying high-quality, third-party investment managers across the hedge fund, long-only and private equity universes. We leverage this expertise to help clients assemble portfolios that we believe best fit their needs and goals, offering clients a range of solutions from complete portfolio management to fulfillment of specific hedge-fund and alternative-asset mandates.

Private Equity and Real Estate

Private Equity and Real Estate

Brown Advisory has incorporated private equity and real estate investments in client portfolios since our founding. Today, we can provide that exposure in three distinct ways.

Feeder Funds and Multimanager Funds
We introduce clients to investment opportunities in early- and late-stage venture capital and buyout funds, as well as select real estate funds. We also construct these feeder funds into multimanager funds through our Private Equity Partners (PEP) and Real Estate Partners (REP) vehicles to make private equity investing as easy as possible for our clients.

Customized Private Equity Portfolios
For most clients, private equity is one component of a balanced portfolio that we manage. Other clients, however, come to us specifically for custom-built private equity and real estate portfolios.

Sustainable Investing

Sustainable Investing Strategies

  • Multi-Manager Strategies
  • For clients seeking an open-architecture solution, we have access to several of the premier sustainable managers in the industry - all vetted by internal research.
  • Private Equity
  • Our private equity team is focused on evaluating the growing universe of private impact investments to identify standout opportunities that target various issues of particular concern to our clients. To date, we have placed assets in investments targeting a variety of impact themes such as community impact, microfinance, education technology, sustainable real estate, water initiatives and others.*
  • *Many alternative investments by regulation may only be sold to Accredited Investors (institutions with at least $5 million in assets) or Qualified Purchasers (institutions with at least $25 million in investments).

Customized Portfolios

This diverse assortment of solutions will meet many clients’ sustainability objectives; however, we understand the continued evolution of this space and seek to be able to react quickly to client needs.

For clients with unique missions, value-aligned investing programs, or who simply wish to ensure that they do not own certain controversial companies or have access to certain industries, we offer the following customized options:

Additional Screening: To the extent we have reliable data and can build rules into our compliance systems, we can add specific screens to a separate account to restrict companies (e.g. oil and gas providers) or industries (e.g. tobacco or weaponry).

Customized and Thematic Portfolios: Within a separate account, we can work together to solve for a sustainability need. From a universe of securities researched from both the bottom-up and for their ESG profile, we can assemble a custom portfolio of securities designed to meet many specific sustainable goals or outcomes.

Investment Insights and Thoughts from Brown Advisory
Equities Vertical Leap: What’s Driving Vertical Software Companies
Emily Wachtmeister, CFA
June 28, 2018

In the software industry, the big, horizontal “platform” companies tend to attract the lion’s share of attention from investors and the financial media. Firms like Microsoft and Salesforce are household names at this point; other companies like Workday and ServiceNow are less familiar to the average person but quite well known to the investment community. These firms are appealing for many reasons. They serve huge total addressable markets (TAMs), often reaching $100 billion or more. They drive their results with massive sales teams. Nine-figure contracts with a single enterprise customer are not uncommon.

Although our world is increasingly dominated by these large horizontal tech firms, we believe that investors should not ignore the potential of more narrowly focused vertical software companies. Many of these firms offer attractive earnings and cash flow growth potential—more than enough to make up for their smaller scale and addressable markets.

What are the success drivers for these vertical players?

  • Focused research and development: With a focus on a single industry or sector, these companies can concentrate their efforts on the features and analytics that their vertical specifically needs. In many cases, this allows them to outpace horizontal firms that need to serve many masters.
  • Pricing power: Being a “price maker” (vs. a “price taker”) in software usually requires either proprietary features or proprietary data sets, and the best vertical companies can often provide both. With respect to data, these firms are working with many of the leading competitors in a given vertical, allowing them to gather valuable market-wide datasets; they can provide that data back to their customers in an anonymized fashion, which gives those customers invaluable information about best practices in their industry and how they stack up against their peers.
  • Lower customer acquisition costs: Vertical firms typically exhibit notably lower sales and marketing expense than the average software company. One primary reason is referrals and/or reference accounts: Once a software company proves its mettle with a few admired firms in an industry, the other players in that industry are typically much more open to doing business with them. Additionally, these firms can tightly tailor their sales approach to dovetail with the unique vocabulary and operating models processes within a specific industry.

Taken together, these advantages can help vertical companies build leading—sometimes dominant—market share, and achieve enviable operating margins. As shown in the chart below, vertical software firms generated better gross margins and lower sales & marketing costs than the broader industry in 2017. The end result: Vertical firms were almost twice as profitable as the industry average as measured by EBITDA.

Fundamental Comparison, Vertical Software versus All Software (Calendar Year 2017)

Source: Bloomberg. “All Software” refers to NYSE- and NASDAQ-traded companies categorized as Prepackaged Software under the Standard Industrial Classification (SIC) system. “Vertical Software” refers to a subset of those companies whose revenue is  predominantly sourced from a specific vertical industry, according to Brown Advisory analysis.

There are a variety of examples that demonstrate the ability of these firms to gain primacy within their verticals: AspenTech serves the energy and chemicals industries, Tyler Technologies serves state and local governments, and Blackbaud works with nonprofits; all of these companies have leading market share in their respective markets, and report winning as much as 80% of the new contracts for which they compete. Veeva is notable as a CRM competitor in the pharmaceutical industry; the CRM market is increasingly dominated by Salesforce, but within this vertical, Veeva retains a 70%+ market share and its position is so strong that Salesforce has chosen to partner with Veeva rather than compete head-to-head.

The software universe will likely always have a group of titans that cast a long shadow over many industries, but vertically focused companies continue to prove their ability to carve out defensible positions, generate value for customers and perform well for shareholders. 

The views expressed are those of Brown Advisory as of the date referenced and are subject to change at any time based on market or other conditions. These views are not intended to be and should not be relied upon as investment advice and are not intended to be a forecast of future events or a guarantee of future results. Past performance is not a guarantee of future performance and you may not get back the amount invested.

The information provided in this material is not intended to be and should not be considered to be a recommendation or suggestion to engage in or refrain from a particular course of action or to make or hold a particular investment or pursue a particular investment strategy, including whether or not to buy, sell, or hold any of the securities or asset classes mentioned. It should not be assumed that investments in such securities or asset classes have been or will be profitable. To the extent specific securities are mentioned, they have been selected by the author on an objective basis to illustrate views expressed in the commentary and do not represent all of the securities purchased, sold or recommended for advisory clients. The information contained herein has been prepared from sources believed reliable but is not guaranteed by us as to its timeliness or accuracy, and is not a complete summary or statement of all available data. This piece is intended solely for our clients and prospective clients, is for informational purposes only, and is not individually tailored for or directed to any particular client or prospective client.
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