Buy, Hold or Sell: Brown Advisory US Smaller Companies

Chris Berrier, manager of Brown Advisory US Smaller Companies, reveals how he takes advantage of trading to top up position he intends to hold for the long run

Annalisa Esposito 7 February, 2020 | 10:49AM
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The US small-cap space is full of hidden gems. Chris Berrier, manager of the four-star rated Brown Advisory US Smaller Companies fund, considers himself something of an expert in this universe, which he has covered for more than two decades.

He is hunting for businesses that possess what he calls the “Three Gs”: durable growth, sound governance and scalable go-to-market strategies. “Companies that possess these traits have a higher probability of becoming much larger and higher quality,” he explains.

Being a long-term investor, his portfolio typically has a low turnover rate. However, Berrier does use trading to increase his stake in a firm when he feels it is trading below its fair value. “We don’t trade that often. Our trading spikes during periods of volatility as opportunities moves around,” he explains. “We are always prepared for volatility and try to take advantage of it.”

The fund has delivered annualised returns of 16.3% over five years, 2.4 percentage points ahead of its Morningstar Category Average.

Buy: Dynatrace (DT)

Every year Berrier meets with around 500 small and medium-sized companies across the US to expand his knowledge of what's on the market (he also manages a mid-cap fund, the Brown Advisory US Mid-Cap Growth fund).

He bought shares in Dynatrace when the firm floated on the stock market in August 2019. It's a software company that focuses on few things including performance management and artificial intelligence for businesses. But he believes the main strength of the company lies in being a fast and automated product that manages the digital transformation of businesses.

“It benefits from companies increasing moving their workloads into the cloud,” he explains. “As we conducted more research, we found Dynatrace was a leader in the market, simplifying a lot of complexity in management and making it easier for consumers to migrate to the cloud too.”

The clincher, which helped him to decide to invest in the company, was the high customer satisfaction levels. “It was a compelling market opportunity. The firm provides a great customer support – it's a young company, very profitable and is gaining market share.”

Berrier hopes to hold the company for the long-term, depending on its performance. Its shares were $16 at IPO and have already nearly doubled to just shy of $32. A fan of the sector, he also has a stake in its competitor, Datadog (DDOG), in his mid-cap fund.

He adds: “These companies [Dynatrace and Datadog] are emblematic of the way we carry out a lot of work in an area of the market, getting an understanding of the space, focusing on one or two companies that have the best products.”

Hold: Evo Payments (EVOP)

Another company Berrier bought at IPO, Evo Payments processed 1 billion transactions in North America and almost 2.5 billion in Europe over the past 12 months alone. Based in the US, it's a payments provider that lets people make transactions in more than 150 currencies across 50 countries. Evo estimates that it processes around $100 billion of transactions a year.

This isn't the first payments company Barrier has backed and he has a good understanding of the space as a result. This time round, he made the decision to invest after meeting the company's chief executive, James Kelly, in 2018, who had previously worked at Global Payments (GPN), another stock Berrier had invested in.

Shares floated at $16 and Berrier added to his holding as the share price grew to around $20 - currently they are trading at $29. “Our hope is to keep holding this position for a very long period of time,” he adds.

Selling: Calavo Growers (CVGW)

Berrier has recently sold Calavo Growers “to allocate those dollars to other better ideas that produce better returns”.

The company is a big producer of avocados and has benefited from the “wellness boom” that has seen a surge in avocado consumption in US - not to mention the millions of millennial brunches that centre around smashed avocado on toast. Calavo also has a small business that produces healthy fresh prepared food.

He bought the stock in January 2018, drip-feeding money in as the share price passed through the high $70s to the low $80s. But a number of issues, including some questions over governance and concerns about the share price valuation saw him recently sell out of the stock. During the time he held the shares, they were fairly volatile, fluctuating between $70 and more than $100. 

“We made from profit from it, but it was harder than we believed. We had to trade around the name significantly, but the entry point was quite good which helped,” he says.

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

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About Author

Annalisa Esposito  is a data journalist for Morningstar.co.uk