Brown Advisory Ethical Selection Q2 2022 commentary

Market overview 

During a difficult second quarter for the market, the strategy lost 17.23 percent, narrowly trailing the benchmark Russell 3000® Index which lost 16.7 percent. Strong performance within real estate (particularly American Tower), materials, and information technology (driven by the position in Genpact) was offset by weakness in industrials (United Rentals) and other stock-specific performance during the quarter. 

In the first quarter of 2022 the world witnessed the intersection of various macro issues such as the pandemic, geopolitical instability, inflation and rising interest rates—these created an extremely complex market environment. Companies' results during the second quarter were generally decent but showed some caution in the outlook. As the quarter progressed, earnings have been revised downwards in anticipation of a more challenging economic picture in the months to come.
 
Reflecting on the past three years, the strategy has navigated many unknowns, and a confluence of uncertain situations will likely continue in the near term. During such periods, Brown Advisory Ethical Selection investment team continues to believe in their process, which has driven outperformance over the long term by using rigorous bottom-up security analysis, ESG alignment of investments and thoughtful portfolio construction. This should lead to meaningful outperformance in the long run.

Portfolio performance (net of fees)

Best-performing positions in Q2 2022 (note that the performance shown for the quarter reflects the performance of the security during the part of the quarter it was owned by Brown Advisory, not necessarily the performance of the security itself for the full quarter

• American Tower rallied off a weak first quarter as investors bought the relative stability of towers during an expected strong 5G CapEx cycle. Results were solid as expected.
  
  
• UnitedHealth reported a solid beat-and-raise during the quarter. Strength was broad-based across its UnitedHealthcare and Optum business units, and the company raised guidance on the continued underlying strength in the core business.  The company also published its annual Sustainability Report at the end of the quarter, which included several new long-term initiatives focusing on advancing health equity and improving environmental health; notably, the company announced a goal to achieve operational net-zero emissions by 2035, has committed to setting net-zero science-based emission reduction targets, and aims to source 100 percent of its global electricity demand from renewable sources by 2030. UnitedHealth continues to make progress on its long-term commitments to expand access to care, improve health care affordability and achieve better health outcomes.
  
  
• Veeva reported a strong first quarter with all key metrics exceeding expectations, largely due to continued momentum across its commercial and R&D product suites, and management also increased full-year guidance.  The company announced that it signed one of its largest deals in the company’s history with a top pharmaceutical company; these large business wins continue to position Veeva as a strategic partner to the pharmaceutical industry. 
  
  
• Genpact reported strong top-line and bottom-line performance during the quarter, both ahead of expectations, and management raised full-year guidance. There continues to be healthy demand for Business Process Outsourcing, and management has been able to navigate wage inflationary pressures.
  
  
• First Citizens outperformed during the quarter following a strong earnings release, coupled with attractive valuation levels.

Worst-performing positions in Q2 2022 (note that the performance shown for the quarter reflects the performance of the security during the part of the quarter it was owned by Brown Advisory, not necessarily the performance of the security itself for the full quarter)

• Marvell reported strong results during the quarter and guidance was similarly positive for the July quarter; however, the company's stock traded off with other high-multiple stocks.
  
  
• Amazon's weakness stems from a poor first-quarter report and guidance largely due to much higher expenses and inefficiencies as the company has overbuilt capacity and overhired to address Covid-related demand last year. Slowing demand compared to last year exacerbated the expense pressure.   During the quarter, we were pleased to see the company announce numerous renewable energy projects, which increase Amazon's renewable energy portfolio to nearly 30 percent, on a path to reach 100 percent by 2025—five years ahead of its 2030 target.
  
  
• Alphabet slightly underperformed in the quarter as investors grow concerned about a recession, which would impact advertising spend. Based on our checks, YouTube is seeing some weakness due to brand advertising exposure and tough direct response compared to 2021. We are lapping a period of stay-at-home and stimulus that will be difficult to compare in 2022.
  
  
• Despite a strong quarterly earnings release, United Rentals stock fell given broader investor sentiment as recessionary rhetoric has picked up; the CFO also announced their departure in the quarter which had investors questioning the company’s forward-looking prospects.
  
  
• KKR underperformed along with other asset managers given a difficult market backdrop, while KKR also has a capital markets business that investors feared would slow. 

Changes to the portfolio throughout the quarter

No changes were made to the portfolio holdings during the quarter.