Barron's Magazine feature on Eddie Brown
Eddie Brown’s Fund Beat 99% of Its Peers by Picking Exceptional Stocks — and Employees
By Sarah Max
July 2, 2020 2:10 pm ET
The single biggest motivating factor throughout Eddie Brown’s career has been to pay forward a life-changing gift he received in his senior year of high school. “One of my greatest regrets is I didn’t have enough sense at a young age to seek out the person who was my benefactor and thank her,” says Brown, founder of Baltimore-based Brown Capital Management.
Brown, who will turn 80 later this year, grew up under Jim Crow in Florida, where he was raised by his grandparents and learned about entrepreneurship from his uncle, a moonshiner. After his grandmother passed away, his family sent him north to live with his mother in Allentown, Pa. There, his good grades, grit, and personality caught the attention of a community leader who connected Brown with an anonymous benefactor. She paid his tuition and room and board at Howard University, where he studied electrical engineering and met his wife of 57 years, Sylvia.
After working at IBM designing computer circuits, Brown realized that his real passion—and potential to build enough wealth to be philanthropic—was in investing. Following an M.B.A. and a stint at the family office of industrialist J. Irwin Miller, Brown landed a portfolio manager position at T. Rowe Price.
In 1983, Brown struck out on his own, founding Brown Capital Management, not because of a dearth of opportunity, he says, but because the timing was right and his philanthropic goals loomed large. The now 36-person employee-owned firm manages $14 billion in assets, including the $5.9 billion Brown Capital Management Small Company fund (ticker: BCSIX), which is up an average of 14.3% over the past 15 years, better than 99% of its small-cap growth peers.
Meanwhile, the Eddie C. and C. Sylvia Brown Foundation has given more than $40 million to support education and public health in impoverished communities, and expose more people to visual and performing arts by African-Americans.
At a time when America is taking a hard look at racial equality, and companies are rolling out commitments to do better, the investment industry lags far behind. Firms owned by women and minorities are overrepresented in the top quartile of performance, but manage just 1.3% of all assets, according to a 2019 study from Bella Research Group and the John S. and James L. Knight Foundation.
Barron’s spoke with Brown about his unconventional path to asset management, his firm’s investment philosophy, and why more women and minorities need a seat at the table.
Barron’s: Brown Capital just celebrated its 37th anniversary. What motivated you to start your own firm?
Eddie Brown: I was in my early 40s and realized if I were ever going to do it, I needed to do it then, because if it didn’t work, I wanted to be young enough that I could go back and get a job. We’re one of the oldest African-American owned investment management firms in the world. I give my friend John Rogers, who started Ariel Investments in January of 1983, credit for being the “oldest,” but even in John’s presence, I say it’s only by six months.
A 2019 study found that firms owned by minorities and women effectively have to work 10 times as hard for assets. Have you found that to be the case?
I don’t know what the multiplier is, but it’s really strange to me that, with our investment philosophy and our performance track record, while competing with the best and the brightest, we’re only at $14 billion. Why don’t we manage $50 billion? I don’t know, but I can only think of one reason.
Why is race and gender such a barrier in an industry based on performance?
I have no facts, but I have theories based on my experience. The first thing is there are not enough people of color—and I would expand that to include women—who are at the table where these decisions are made for allocating major pools of money. So, when the decisions are made, there are no folks to say, “Wait a minute, why are we going this way?”
People tend to hire people like themselves. When you look at the makeup of key investment decision makers on Wall Street, very few are African-Americans. In fact, I give T. Rowe Price a lot of credit—when they hired me in 1973, it wasn’t the kind of environment where there was some competitive advantage to hire an African-American portfolio manager. That was a bold move at that time.
How should the industry improve?
Firms need to make a bigger effort to be diverse. People used to say, “I can’t find Black people with credentials and experience.” Well, you have to have a commitment to seek out those people.
You’re credited with first using the term GARP, or growth at a reasonable price. What’s the back story?
I came from T. Rowe Price, whose founder is credited with having coined the term “growth investing,” so I have always been committed to growth, but I’m also value-conscious. I called my investment philosophy GARP. I was a regular panelist on Wall $treet Week with Louis Rukeyser, and in the 1980s he featured GARP in one of his newsletters. It has become so popular that we don’t talk about it as a selling point, but we still adhere to the principle.
What are other key points to know about your investment philosophy?
The portfolios have always been, and still are, by the industry standards, concentrated—about 60 to 65 holdings max. We’ve always invested in exceptional growth companies, though in the early days, funds weren’t broken out by company size. As time went by, we saw an opportunity to focus on small and midsize companies.
One thing that is different from a lot of our peers is we define company size by revenue, not by market capitalization. Here’s some perspective: In 2008, General Motors got down to a couple billion dollars [editor’s note: $2.6 billion in October 2008] in market cap, but it was still one of the largest companies in terms of sales. The idea that a small-cap manager would invest in GM seemed ridiculous.
What does growth mean for you?
We’re looking for a minimum of high-single digit revenue growth, and a low-double digit or higher earnings growth because the companies that we tend to favor have high profitability.
How do you find companies?
We do our own independent research, and we are team-based. I said from day one it’s too risky to have a star portfolio management system. Unlike many firms where you have a separate group of researchers presenting ideas to the portfolio managers, we’re all portfolio managers and analysts. We have custom sectors and kind of divvy up and rotate responsibility. This way, every team member on a portfolio is familiar with the total portfolio. Because we do so much work up front, our turnover by industry standards is extremely low [17% versus an average of 75% for small-cap growth funds].
What are some stocks you like?
There are some overlaps between the small- and midsize-company strategies because we have different revenue bands for initial investments. Tyler Technologies [TYL] is the largest software provider to the public sector; We’ve owned it since 2005, and earnings have compounded 14% over that time. Looking forward, we think growth will slow to the high-single digits, but it’s still a growth company. When I say public sector, I mean local government and agencies handling their back-office functions, whether it’s property taxes, public safety, financial management, or the court and judicial systems. There are 88,000 local jurisdictions in the U.S., and they have about 11,000 of them, so they still have a lot of opportunity.
Another one we bought in our small-company strategy and also own in the midsize-company portfolio is Veeva Systems [VEEV], which is a cloud-based solution for the global life-sciences industry. Early on in their cycle, they were mainly tied to pharmaceutical companies for customer relationship-management solutions, so they were kind of limited. But then, back in 2012, they got another leg of growth that is data and workflow management systems, which more than doubled their total addressable market. Now, we’re looking for more like 18% revenue growth over the next several years. I would say that’s brilliant strategic management.
How about one more example?
Manhattan Associates (MANH) provides supply-chain execution software for warehouse management, transportation management, inventory, scheduling, and logistics. We’ve owned it since 2001, over which time its relevant addressable market has grown to about $4 billion. Growth slowed over the past couple of years as the company executed a cloud transition, but we think the company is now on track to produce low double-digit sales and earnings growth over the next few years.
Like many people, you’re working from home. Before Covid-19, were you going to the office every day?
I think where you’re headed is, am I planning to retire anytime soon? And the answer is no. But I do want to mention something I think is a differentiator. I’d been getting the question about succession and exit strategy since the late 1990s. People said, ‘You have to sell the firm,” and I said, “No, we have the second-oldest African-American-owned investment management firm in the world. I want to keep our place in history. We’ll figure it out.” In 2016, we converted to an ESOP [employee stock ownership plan], giving all of our employees equity.
You have a big birthday coming up. How do you envision your legacy?
I never thought about that question, so I don’t have a canned answer. [Pauses.] “Eddie Brown created an exceptional investment firm that is well-diversified racially, at all levels, and always treated employees fairly.”
T. Rowe Price, the man, said something I adopted when I started Brown Capital Management, and that is, the most important assets of an investment management firm walk out the door every night. You should hire the best and the brightest, you should treat them well, and you should give them a great work environment. And don’t forget this part: You also have to give them a piece of a pie, some ownership. If you do all of those things, which is what my legacy hopefully is, you will build an enterprise that will last.
Thank you, Eddie.