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BBH Stays Unhedged With New Global Fund

BBH Global Core Select manager Tim Hartch avoids currency hedging so he can eliminate complexities in managing the portfolio and maintain a focus on stable underlying businesses.

Shannon Zimmerman: Let's shift gears a little and talk about your new fund, which you opened in March, BBH Global Core Select. It's a world-stock fund, so it has domestic equities, as well as foreign stocks.

Tim Hartch: Yes.

Zimmerman: But that's also true of BBH Core Select. You have about 12% of the portfolio invested in companies domiciled outside the U.S. right now according to our data, and you haven't been shy in the past about investing internationally in that fund. How much overlap should investors anticipate between the international holdings? And then because it is world-stock fund, on the domestic side the same question, what will be the correlation between the holdings in the two sleeves of Global Core Select versus Core Select?

Hartch: Well, we expect there will be some overlap. But in Core Select, which is the main fund where most of our assets are, we have historically limited to no more than 20%, and as you've indicated, it's generally been sort of around 10% to 15%. And we've really focused on certain global businesses, particularly in the consumer space and in health care, which really are global industries. And if you prefer Diageo as an investment versus Beam or Brown-Forman in the spirits industry, there is really no reason from an investment perspective other than where they're domiciled to buy the U.S.-domiciled name versus the U.K.-domiciled name. We've owned another, Nestle, and we owned Cadbury before it was acquired.

So, one of the things in the consumer space that's very important is global distribution. And those European food companies, and to a certain extent health-care companies, really have had phenomenal distribution. A company like Nestle gets today 45% of its revenues from emerging markets. So, that's really an enviable position, and that's really why we've owned those in Core Select. The intention with the global strategy is to have a much broader range of opportunities around the world to buy, for example, a bank in Sweden that we would never have considered for Core Select. So, we have Handelsbanken.

Zimmerman: Which isn't a multinational?

Hartch: Yes, it's a Nordic bank. It also has an operation in the U.K. But really it's a regional bank outside of the U.S. And so, it's more of those kinds of businesses that we've never owned in Core Select.

Zimmerman: Right. An important distinction, right? So in Core Select--and we've talked about this in previous interviews that I've conducted with you and your comanager there, Mike Keller--really those are multinationals in the Core Select portfolio and so really country of domicile is almost arbitrary because they're generating their revenue from so many other sources. But in Global Core Select it's going to be more focused on companies that are domiciled in the countries from which they derive most of their revenue?

Hartch: Correct. So, that obviously introduces some currency variability and volatility. But we've been very pleased to add a number of names into the portfolio that are very dominant in their local markets. There is a Canadian insurance company called Intact Financial that we made investment in the global fund, and it's an excellent business that we're very pleased to have in the portfolio.

Zimmerman: So, you mentioned there is some currency risk that comes with a fund like Global Core Select and the mandate that you just described. What's the fund shop's experience with managing currency risk, and have brought new people on staff or have you needed to bring new people on staff to manage that part of the portfolio?

Hartch: We've historically not hedged our currency exposure. So, if we're too worried about the currency exposure, we've chosen not to make the investment. Instead, we've focused on the underlying business. And we think there is the benefit in simplicity. We have a relatively simple approach in terms of focusing on high-quality businesses trying to be patient and wait for opportunities. If you're trying to hedge currency, while it's not that hard to do, it does add some complexity, and you can get it wrong.

We are really focused on the underlying businesses as opposed to trying to speculate on the currencies. And in terms of people we really do have a phenomenal team of people. It's really that we did add several people over the last two years in preparation for the launch of the global strategy, and I think we are well-staffed to manage it. And we've always owned companies outside the U.S.

So, we started with a very strong base, particularly in the consumer area and health care, and where we've had to gain additional knowledge would really be in financials, industrials, and energy. They are three areas that I'd highlight where we've really done a significant amount of additional work on new businesses that we really didn't know a couple of years ago.

Zimmerman: Let me draw you out a little bit further on the currency question because you mentioned that you like the value of simplicity and then if you speculate in currency, you can get it wrong. Some would say if you're not hedging out your currency, it's a bet on the dollar. How do you account for that kind of speculation?

Hartch: Well, I think, we're just focused on the business, and we think that a high-quality business, whether it's in Canada or in Sweden, where you do have a stable legal framework and relatively stable currencies, if they execute effectively, they are going to be able to create value for us on an absolute basis. Now, obviously, how those currencies move versus the U.S. will impact what those returns are certainly in the short term. But over the long term, I think it's the business that's going to dominate, and we've chosen not to hedge the positions.

Zimmerman: Well, Tim, thank you for coming in today. It's been wonderful to talk to you about both Core Select and then brand new Global Core Select. Good luck with that one.

Hartch: Thank you very much.

Zimmerman: For Morningstar, I'm Shannon Zimmerman.

Shannon Zimmerman does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.