“They say misery loves company, but I’d just not prefer the misery, whoever is riding along beside me.”
- Allen Dulles
Brown Capital and Nintai Investment’s Overlap
One of the things we do at Nintai is track funds that share common holdings with our funds. The one that has remained the closest since our inception has been Brown Capital Management Small Company (BCSIX). The fund is rated Gold by Morningstar and two stars for performance. It manages $1.3B in assets with a 12% turnover rate. Morningstar places it in its small growth investment style box (where the Nintai Model Portfolio sits). It currently shares four of its top ten holdings with Nintai, including Guidewire Software (GWRE), Manhattan Associates (MANH), Tyler Technologies (TYL), and Veeva Systems (VEEV). The fund has thirty-nine positions in its portfolio, of which seven are also in the Nintai Portfolios.
Several characteristics drive these commonalities. First, Brown Capital looks for companies with strong growth characteristics and equally strong financials. Second, any holding should demonstrate a deep competitive moat, which helps maintain a strong competitive advantage. Last, Brown Capital is happy to allow compounding to work its magic over a decade or longer. These characteristics drive an extraordinarily low turnover rate similar to Nintai Investment’s. Brown Capital’s 2023 turnover was in the range of 12% compared to Nintai’s 8%.
Issues with Brown Capital Management
Having highlighted the characteristics of Brown Capital Management’s and Nintai’s investment strategies, I should point out that the past three-and-a-half years have been extremely difficult for Brown Capital and Nintai. The mutual fund’s total return was among the Small-Growth Morningstar Category’s worst from September 2020 through June 2024. Respectively, the fund has been placed in the category’s 92ndpercentile in 2021, 91st percentile in 2022, 33rd percentile in 2023, and 90th percentile through June 30, 2024. Compare this to the category’s 12th percentile in 2017, 20th percentile in 2018, 38thpercentile in 2019, and 30th percentile in 2020.
So, what has happened since 2021? Has Brown Capital Management lost its mojo? Has a turnover in its ranks completely changed its investment strategy? The short answer is no. Manager Keith Lee has been with the fund since 1992 (wow!). His tenure includes a very similar downswing in the mid-2000s.
The company will pay out a massive capital gain distribution at the end of 2024. It is expected to be nearly one-third of total investor share net asset value. You read that right. This payout is due for two reasons. First, the fund lost one of its largest customers, who pulled out significant assets. On top of that, individual investors pulled out nearly $1B during the year. This has required management to sell off quite a few positions. The good thing? Almost all of the distribution will be long-term capital gains. The fund tends to hold positions for five-to-ten years or longer.
The issues that have dogged the Brown Capital team over the past four years have been similar to those of Nintai’s. First, they dramatically missed with their pick of Cryoport (CYRX), which, after peaking in November 2021 at $82/share, traded at roughly $7.75 this month. This is a shade of Nintai’s experience with New Oriental Education & Technology (EDU). Second, positions that were real winners during the COVID-19 epidemic returned to earth over the next several years. The company didn’t take profits when they had the chance and saw returns suffer accordingly. A company in Brown’s and Nintai’s portfolio, Veeva Systems (VEEV), generated huge returns between 2017 and 2021. It rose from $43/share at the beginning of 2017 to $320/share in July 2021. From there, the stock has slowly deflated to $225/share in December 2024. Multiple positions in Brown’s (and Nintai’s) portfolio generated similar results. Brown (and Nintai) could have locked in gains by taking profits in these instances. Unfortunately, that goes against the grain of holding for the genuine long term. Third, and deeply impacted by this pattern, Brown’s focus on small to mid-cap healthcare and technology (making up roughly 90% of total assets under management) stocks completely missed the large-cap run-up over the past three years. This is another attribute Nintai shares with Brown, with technology and healthcare making up roughly 80% of our total investment portfolio.
Similarities to Nintai Investment Returns
We’ve greatly admired Brown Capital Management over the past twenty years that we’ve been in the investment management industry.
Brown Capital and Nintai Investments share profound similarities. First, both companies look to invest long-term and seek companies with deep competitive moats and the ability to convert these into high free cash flow margins over time. These characteristics have proven to prevent permanent capital impairment and the ability to ride out market dislocations easily. Unfortunately, over the past several years, core fundamental strength has mattered little in generating market returns. Since 2021, it has been the Magnificent Seven (giant technology companies) followed by anything AI-related that has pushed markets to all-time highs. Since neither Brown nor Nintai invests in such companies, returns have suffered compared to these stocks.
Second (and something that has hurt in the short term) has been Brown and Nintai’s commitment to holding on to portfolio holdings for decades. In the early 2000s, Warren Buffett talked about how he regretted not taking profits when Coca-Cola (KO) shares had reached all-time highs. In 2020, seven stocks in the Nintai portfolios and 15 stocks in Brown’s portfolios reached all-time highs. With 20/20 hindsight, it would have been best to dramatically cull these holdings and lock in profits. In Nintai’s case, we only did this in one case - Novo Nordisk (NVO). As Buffett would say, this was a perfect case of thumb-sucking on our part.
Unfortunately, the similarities that matter are when it comes to returns. BCSIX and Nintai portfolios have underperformed dramatically over the past three years compared to the S&P 500 and the Russell 2000 indexes. I should note that Nintai uses the Russell 2000 Mid-Cap Growth Index as a comparator, whereas Brown Capital uses the Russell 2000 Small-Cap Growth Index.
The returns for BCSIX and Nintai Investments are seen below. The three and five-year returns are pretty tough. They occurred at the height of the Magnificent Seven and AI booms. Since Brown and Nintai don’t invest in either group, the funds’ returns naturally underperformed.
Brown Capital Small Company (BCSIX) Fund Returns
- Allen Dulles
Brown Capital and Nintai Investment’s Overlap
One of the things we do at Nintai is track funds that share common holdings with our funds. The one that has remained the closest since our inception has been Brown Capital Management Small Company (BCSIX). The fund is rated Gold by Morningstar and two stars for performance. It manages $1.3B in assets with a 12% turnover rate. Morningstar places it in its small growth investment style box (where the Nintai Model Portfolio sits). It currently shares four of its top ten holdings with Nintai, including Guidewire Software (GWRE), Manhattan Associates (MANH), Tyler Technologies (TYL), and Veeva Systems (VEEV). The fund has thirty-nine positions in its portfolio, of which seven are also in the Nintai Portfolios.
Several characteristics drive these commonalities. First, Brown Capital looks for companies with strong growth characteristics and equally strong financials. Second, any holding should demonstrate a deep competitive moat, which helps maintain a strong competitive advantage. Last, Brown Capital is happy to allow compounding to work its magic over a decade or longer. These characteristics drive an extraordinarily low turnover rate similar to Nintai Investment’s. Brown Capital’s 2023 turnover was in the range of 12% compared to Nintai’s 8%.
Issues with Brown Capital Management
Having highlighted the characteristics of Brown Capital Management’s and Nintai’s investment strategies, I should point out that the past three-and-a-half years have been extremely difficult for Brown Capital and Nintai. The mutual fund’s total return was among the Small-Growth Morningstar Category’s worst from September 2020 through June 2024. Respectively, the fund has been placed in the category’s 92ndpercentile in 2021, 91st percentile in 2022, 33rd percentile in 2023, and 90th percentile through June 30, 2024. Compare this to the category’s 12th percentile in 2017, 20th percentile in 2018, 38thpercentile in 2019, and 30th percentile in 2020.
So, what has happened since 2021? Has Brown Capital Management lost its mojo? Has a turnover in its ranks completely changed its investment strategy? The short answer is no. Manager Keith Lee has been with the fund since 1992 (wow!). His tenure includes a very similar downswing in the mid-2000s.
The company will pay out a massive capital gain distribution at the end of 2024. It is expected to be nearly one-third of total investor share net asset value. You read that right. This payout is due for two reasons. First, the fund lost one of its largest customers, who pulled out significant assets. On top of that, individual investors pulled out nearly $1B during the year. This has required management to sell off quite a few positions. The good thing? Almost all of the distribution will be long-term capital gains. The fund tends to hold positions for five-to-ten years or longer.
The issues that have dogged the Brown Capital team over the past four years have been similar to those of Nintai’s. First, they dramatically missed with their pick of Cryoport (CYRX), which, after peaking in November 2021 at $82/share, traded at roughly $7.75 this month. This is a shade of Nintai’s experience with New Oriental Education & Technology (EDU). Second, positions that were real winners during the COVID-19 epidemic returned to earth over the next several years. The company didn’t take profits when they had the chance and saw returns suffer accordingly. A company in Brown’s and Nintai’s portfolio, Veeva Systems (VEEV), generated huge returns between 2017 and 2021. It rose from $43/share at the beginning of 2017 to $320/share in July 2021. From there, the stock has slowly deflated to $225/share in December 2024. Multiple positions in Brown’s (and Nintai’s) portfolio generated similar results. Brown (and Nintai) could have locked in gains by taking profits in these instances. Unfortunately, that goes against the grain of holding for the genuine long term. Third, and deeply impacted by this pattern, Brown’s focus on small to mid-cap healthcare and technology (making up roughly 90% of total assets under management) stocks completely missed the large-cap run-up over the past three years. This is another attribute Nintai shares with Brown, with technology and healthcare making up roughly 80% of our total investment portfolio.
Similarities to Nintai Investment Returns
We’ve greatly admired Brown Capital Management over the past twenty years that we’ve been in the investment management industry.
Brown Capital and Nintai Investments share profound similarities. First, both companies look to invest long-term and seek companies with deep competitive moats and the ability to convert these into high free cash flow margins over time. These characteristics have proven to prevent permanent capital impairment and the ability to ride out market dislocations easily. Unfortunately, over the past several years, core fundamental strength has mattered little in generating market returns. Since 2021, it has been the Magnificent Seven (giant technology companies) followed by anything AI-related that has pushed markets to all-time highs. Since neither Brown nor Nintai invests in such companies, returns have suffered compared to these stocks.
Second (and something that has hurt in the short term) has been Brown and Nintai’s commitment to holding on to portfolio holdings for decades. In the early 2000s, Warren Buffett talked about how he regretted not taking profits when Coca-Cola (KO) shares had reached all-time highs. In 2020, seven stocks in the Nintai portfolios and 15 stocks in Brown’s portfolios reached all-time highs. With 20/20 hindsight, it would have been best to dramatically cull these holdings and lock in profits. In Nintai’s case, we only did this in one case - Novo Nordisk (NVO). As Buffett would say, this was a perfect case of thumb-sucking on our part.
Unfortunately, the similarities that matter are when it comes to returns. BCSIX and Nintai portfolios have underperformed dramatically over the past three years compared to the S&P 500 and the Russell 2000 indexes. I should note that Nintai uses the Russell 2000 Mid-Cap Growth Index as a comparator, whereas Brown Capital uses the Russell 2000 Small-Cap Growth Index.
The returns for BCSIX and Nintai Investments are seen below. The three and five-year returns are pretty tough. They occurred at the height of the Magnificent Seven and AI booms. Since Brown and Nintai don’t invest in either group, the funds’ returns naturally underperformed.
Brown Capital Small Company (BCSIX) Fund Returns
Nintai Investment Model Portfolio Returns
Conclusions
When we meet with potential (and existing) clients, we often stress the importance of thinking long-term regarding investment strategy and portfolio management. Because we invest with management with a history of outstanding capital allocation, we want compounding to do the heavy lifting in our portfolio holdings. Years of
Underperformance can begin to eat away at even the most confident investment manager. Brown Capital Management’s investment woes give us some comfort that they aren’t a flaw specific to our model. Overall, we remain confident that returns will return to the mean when certain market bubbles inevitably collapse. Until then, we will seek comfort in knowing we are in the company of a great long-term investment management firm. But as Mr. Dulles said, while we enjoy the company of Brown Capital, we’d rather not go along for the ride at all.
Disclosure: Nintai Investments holds Veeva, Guidewire, Manhattan Associates, and Tyler Technologies in all of its client portfolios. Mr. Macpherson also holds these stocks in his personal portfolio.
When we meet with potential (and existing) clients, we often stress the importance of thinking long-term regarding investment strategy and portfolio management. Because we invest with management with a history of outstanding capital allocation, we want compounding to do the heavy lifting in our portfolio holdings. Years of
Underperformance can begin to eat away at even the most confident investment manager. Brown Capital Management’s investment woes give us some comfort that they aren’t a flaw specific to our model. Overall, we remain confident that returns will return to the mean when certain market bubbles inevitably collapse. Until then, we will seek comfort in knowing we are in the company of a great long-term investment management firm. But as Mr. Dulles said, while we enjoy the company of Brown Capital, we’d rather not go along for the ride at all.
Disclosure: Nintai Investments holds Veeva, Guidewire, Manhattan Associates, and Tyler Technologies in all of its client portfolios. Mr. Macpherson also holds these stocks in his personal portfolio.
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