Morningstar - Q2 2021 - 64

Investors

Brown Capital Management
International Small Company BCSFX

which hired the firm in its early days as part
of a program to support emerging minority and
women managers.

Growth of $10K

$20K
15.72
15

BCSFX

12.70
10

MSCI World Ex USA
SMID Growth NR

04/2018

04/2019

Morningstar Category

" Diversity is not just the right thing to do, " Chen
says. " It can improve performance as well.
On our own investment team, 12 of the 13 people
are women or people of color. "

5
04/2020
Foreign Small/Mid
Growth

Morningstar Rating

QQQQQ

Expense Ratio (%)

1.15

Source: Morningstar Direct. Data as of 03/31/2021.

was comparable within the investment universe, "
he recalls. " I said, 'I don't know who Brown
Capital is by face, but I know them by the numbers
and I'd love to talk to them.' "
The firm has maintained a sense of community
through the pandemic by taking its monthly
townhall gathering online. Meanwhile, the
international team has kept its rhythm of weekly
formal meetings and informal daily check-ins
from afar-even Goyal, who moved with his family
to Japan at the beginning of the pandemic to
stay with his in-laws but works East Coast hours.
" That's probably the hardest adjustment, "
he laughs. " My kids think I'm a vampire now! "

The Rockefeller Foundation seeks out skilled
managers with broad global mandates.
" I'd kept an eye on Brown Capital since I left New
York State, " Chen says, " and watched as the
international team was built out. We hired them
in March 2020, near the market bottom, and
captured the full market rebound and then some. "
Building Connections

The International Small Company fund's 45.1%
return in 2020 was outsized in absolute terms, but
its position among the top performers in its
category is customary. While the fund lagged in
2021's first quarter, its long-term performance
remains strong. From October 2015 through March
31, it has an annualized 19.3% return compared
with 12.2% for its average category peer.
It's worth noting that the team's other charge, the
all-cap Brown Capital Management International
Equity BCISX, has a middling record, though
that fund has undergone a renovation. It opened
in 1999 and today has only $65 million in assets.
While Haywood joined the fund's previous
managers in 2007, the strategy had more of a core
orientation than a quality growth bent until
2019. Once the small-cap strategy hit its stride, the
firm relaxed constraints that had limited overlap
between the two strategies. Today, around one
third of the team's picks are in both portfolios-
and MercadoLibre remains in the all-cap version.

" They make a solid team, " says Ron Chen, a
managing director in the investment office of The
Rockefeller Foundation. " You can tell after
meeting them that there are synergies with their
different life experiences and personalities. "

In a typical year, members of the team will make
about a dozen trips to visit management
overseas, as well as meet with industry experts
and user groups. They've continued this kind
of research remotely and added five new holdings
over the past year in the small company fund.

Chen has followed Brown Capital since the
mid-1990s, when he was an investment officer at
the New York State Common Retirement Fund,

One of these is AJ Bell AJB:UK, which Boston calls
a " scaled-down version of Charles Schwab " in
the U.K. space. The firm has less than 2% market

64

Morningstar Q2 2021

share, he says, " so there's durability of revenue
growth ahead. " The team was able to have
a call with the founder and talk to advisors and
clients. As with every stock considered for the
portfolio, the team's work culminated in a research
report with an earnings model and valuation
model, which kicked off a discussion to develop a
consensus on whether and how to move forward.
Evered puts forth Abcam ABC:UK, which the
international small company fund has owned since
inception, as an exemplar. Founded by a
Cambridge researcher who needed antibodies for
his own research, the firm has a built a strong
competitive position: Its e-commerce site is
a differentiated model, and the company excels at
logistics, enabling it to ship around the world
quickly. Its growth rate is twice the industry's, and
it is taking share in a large market.
" They have an excellent management team and
a business that provides resources to fund growth, "
Evered says. " Our first work-from-home remote call
was with their team, " Haywood recalls.
Goyal adds that their access was facilitated by
relationships they had developed in person-such
as the time they toured Abcam's lab to see how
the science worked, down to peering through
a microscope at slides of brain tissue straight from
the hospital morgue across the street.
Protecting a Legacy

Stories like this illustrate how the portfolio is
built, company by company. But there are
guardrails in place. " We are trying to maximize our
exposure to exceptional growth companies, " says
Boston, " which implies a high level of idiosyncratic
risk. Because we invest in a concentrated
collection, we make sure we're doing it in a
risk-measured way. "
In practice, that means a limit of 33% in any
one of six custom sectors: information/knowledge
management, medical/healthcare, business
services, consumer related, industrial products/
systems, and miscellaneous. Individual
position sizes start at 0.5% to 2.5% and are capped
at 6%. The strategy isn't hedged, but the team
assesses any operational headwinds created by
fluctuating currencies when evaluating a company.
Morningstar - Q2 2021

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