BROWN ADVISORY GLOBAL LEADERS: Playing the long game with companies that change their customers’ lives

When Mick Dillon looks for promising companies to add to the Brown Advisory Global Leaders fund he co-manages, his starting point is not the profits they generate or the value they provide to shareholders.

Instead, he thinks of his customers first.

“We look at how a company helps its customers: how does it change their lives or make their work easier,” he says.

‘Economic theorists may disagree, but the most important person is not the shareholder. Because if you don’t have customers, you don’t have a business.’

The result is a portfolio of 30 to 40 companies across various sectors, with the main holdings being Microsoft, the parent company of Google, Alphabet and Deutsche Boerse, the German stock exchange.

The fund, which launched in 2015, manages $3.06 billion (£2.38 billion) in assets.

Dillon and his co-manager Bertie Thomson prefer to buy and hold for the long term, with almost half of the current holdings in the portfolio since inception.

So they think long and hard before they buy – and make sure they find businesses at the right price. That often means they pass up businesses with great potential because they are too expensive to fit their strategy.

“We want double-digit returns,” Dillon says. “The reason we’re targeting that is because if we can compound our investors’ money at 10 percent a year, we’ll have doubled it in seven years. That’s a very high threshold, which means we’re missing out on a lot of things.”

Sometimes, however, it is a matter of waiting for the price to drop before striking.

Such an opportunity arose earlier this year, when the share price of animal health company Zoetis fell.

The company produces a drug that provides pain relief to dogs with osteoarthritis, but its stock price fell after reports that some animals suffered side effects.

A clinical study has shown it to be safe and have few side effects, says Dillon, a dog lover for whom the company’s appeal was clear.

“Of course it’s sad if one of the affected is your dog, but most animals have fantastic results. We jumped at the chance to buy it.”

The fund’s long-term approach allows Dillon and Thomson to look beyond the short-term concerns that distract some investors and seek opportunities that take time to bear fruit.

For that reason, during the pandemic, when international air traffic came to a standstill, they doubled their investment in aircraft engine supplier Safran.

“We asked ourselves whether the conditions that were driving the revenue would still exist in five years, and we concluded that they would not,” Dillon said. “So we were able to buy when it seemed like a surprising decision in the short term.”

The fund has returned 12.8 percent over five years, higher than the 11.7 percent of its benchmark for global companies.

Dillon and Thomson are obsessed with behavioral investing and manage their own biases to ensure they don’t lead to bad decisions.

They are alert to the endowment effect, where people value things they already have more than things they don’t have.

They also protect against loss aversion, where people are willing to take more risk to avoid losses than to make gains.

The duo meets with a coach every quarter to talk about their successes and failures and analyze their processes. “This helps us learn from our mistakes and continually improve,” Dillon says.

The fund’s ongoing charges amount to 0.88 percent.