STRATEGY INSIGHTApril 2014

The S&P 500 index closed on March 9, 2009 at 676. Five years later, the index stands at over 1,800. On a total return basis with dividends reinvested, U.S. equities are up more than 200%. While the rebound elsewhere has not been as spectacular as in the U.S., European and Japanese equities are still up 130%-150% on a total return basis over the past five years. The surge in developed market equity prices has been accompanied by a dramatic change in sentiment: whereas in March 2009 most investors were extremely pessimistic and fearful of a systemic collapse, many investors today see equities as likely to march higher boosted by perpetually easy monetary policies and technological innovation.

For value investors, who strive to purchase and own securities trading at a discount to their underlying intrinsic values1, todays environment is challenging. There are simply fewer high quality businesses available at obviously attractive valuations. Given this environment, what should value investors do? Below Ive listed five strategies that our equity investment teams are employing at Brown Brothers Harriman & Co.

1. Selling when share prices reach our intrinsic value estimates We prefer owning a good business to holding cash. However, when share prices reach or exceed our intrinsic value estimates, we generally exit our investments. While holding higher levels of cash in a rising market may not feel good, we feel cash provides great protection and flexibility in a down market. We are most interested in generating attractive absolute returns over the long term, not chasing near term relative returns.

2. Avoiding the temptation to purchase lower quality

1 Intrinsic value represents what we believe to be the true value of a security based on our analysis of both tangible and intangible factors.

businesses In past cycles when equity valuations have become more expensive, we have seen investors sell higher quality companies trading at elevated valuation multiples and reinvest in lower quality companies trading at what are perceived to be still reasonable multiples. In our experience trading down in business quality is a mistake. When the next downturn does occur, the lower quality businesses are generally the ones that see their earnings and cash flows decline the most.

3. Insisting on balance sheet strength and high levels of free cash flow Companies with conservative balance sheets that generate high levels of after tax free cash flow are much better positioned to handle economic shocks and challenges. While we do own companies that employ debt in their capital structures, the leverage must always be appropriate for the earnings variability and capital intensity of the business in question.

4. Continuing to own businesses that we believe are well positioned for the next decade When equity valuations appear high, there is a temptation to sell equities to raise cash in an effort to try to time the market. Unfortunately, timing the market is extremely difficult. Even if one could sell at a market peak, one needs to decide when to reinvest. There are some investors who sold their equities in 2008 and 2009 and who are still in cash. Our experience is that the best way to create wealth is by owning high quality businesses over many years. Accordingly, if a business meets our demanding qualitative criteria, is well positioned for the next decade, and is still trading below its estimated intrinsic value, we will generally continue owning shares even if the overall market appears expensive.

Value Investing Five Years After theGreat Financial Crisis

Strategy Insight / april 2014

2brown brothers harriman www.bbh.comim-2014-06-03-1191 bbh001033 Exp. Date 4/30/15

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5. Partnering with management teams that are proven operators and capital allocators A capable management team that executes well, thinks strategically, and allocates capital effectively should add tremendous value to a business over time. This is particularly true in moments of economic and market uncertainty because the best managers often anticipate challenges and can then seize the inevitable opportunities that arise.

In conclusion, equity valuations today are generally not as attractive as they were five years ago or even a year ago. We think today is a time to be careful and patient and to employ the five strategies highlighted above. We also believe that the benefits of value investing should prove particularly evident in the years ahead.

This article has been provided for informational purposes

only and should not be considered investment advice. The opinions expressed are those of the author as of the date of this article, and are subject to change without notice.

Timothy E. HartchBBH Core Select Co-managerBBH Global Core Select Co-manager