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A New Mutual Fund for Rough Markets

Stan Luxenberg

NEW YORK (TheStreet) -- BBH Core Select is one of the most impressive mutual funds of recent years. During the past decade, the fund, which is operated by Brown Brothers Harriman, returned 10.5% annually, outdoing the S&P 500 by 4 percentage points, according to Morningstar.

Besides delivering exceptional returns, this mutual fund was one of the least volatile members of the large blend category as measured by an indicator called standard deviation.

BBH's most outstanding performance came in the turmoil of 2008 when the fund topped the S&P 500 by 15 percentage points and ranked as the top performer in its group.

The compelling results did not go unnoticed. With investors rushing to buy shares, the fund grew from $170 million in assets in 2008 to more than $5 billion now. The flood of assets was particularly notable because it came at a time when many actively managed stock funds were suffering big outflows.

To avoid becoming bloated, BBH Core closed to new investors last year. But you can still gain access to the winning strategy by buying a sister fund, BBH Global Core Select , which began operating recently. The two BBH portfolios resemble each other in many respects. The funds hold some of the same stocks, and Tim Hartch is co-portfolio manager of both funds. He says that the funds search for similar businesses, high-quality operators selling at discounts.

To be sure, the funds are not identical. The flagship Core Select focuses on the U.S., typically keeping 10% to 20% of assets in foreign names. While the Global Core Select holds U.S. names, it can keep most assets abroad.

Can the BBH managers excel in the next decade the way they performed in the past? Maybe not. The company's strategy was ideally suited for the rough markets of recent years. The approach has often trailed in roaring bull markets. Still, the BBH funds could be appealing because of their tendency to deliver steady results in up and down markets.

The portfolio managers limit risk by seeking leading businesses that sell essential products to loyal customers. The managers prefer stocks with high returns on capital and strong balance sheets. Such blue chips are not hard to find. But what has distinguished the BBH managers is their ability to buy stars at modest multiples.

Hartch often takes names that have fallen out of favor. He recently bought Bed Bath & Beyond , a retailer that dominates its niche. Last year the shares sank from around $74 to $55 as investors worried that Amazon.com would steal away sales. Hartch remains confident that Bed Bath & Beyond can keep its customers. "We have a high regard for the business," he says. "The fact that others had some concerns created an opportunity for us," he says.

Hartch cites Google as a favorite holding that is in both funds. The leading search company will remain dominant because it is a cost-effective vehicle for advertisers, says Hartch. "It would be extremely difficult for competitors to unseat Google," he says.

Both funds also own Novartis , the Swiss health care giant. The company has a long record for developing innovative products and selling them around the globe, says Hartch. The Swiss multinational's Alcon line has been generating growing sales by producing contact lenses and medicines for eyes.

The global BBH fund recently bought Pearson , a U.K. publisher that supplies books and online services to educational institutions. The company is struggling to make the transition from print to the digital world. But Hartch argues that Pearson ranks as a global education leader. "Demand will remain strong because schools in the U.S. and Europe need to achieve better outcomes at lower costs," he says.

This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.

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