BBH Core Select fund picks Microsoft over Apple

Brown Brothers Harriman (BBH) Core Select Fund prefers technology companies like Microsoft Corp, which sell mostly to businesses and have a stable customer base, to companies that depend on consumer demand, such as Apple Inc.

The fund, which had assets of $1.3 billion, as of March 31, has invested 2.3 percent of its money in Microsoft. And while it has invested in Microsoft since 2005, it has stayed away from Apple, which makes the iPhone and iPad.

"The longer term challenge for Apple is to continue to innovate and bring new products to the market and sell very large quantities of those products," the fund's co-portfolio manager Tim Hartch told Reuters. "So, as an investor, you are sort of taking a bet on future innovation."

Apple, whose market capitalization briefly topped $600 billion on Tuesday, has seen its stock gain 63 percent in the last six months. A few Wall Street analysts expect it to breach the $1,000-per-share mark in a year or two.

In comparison, shares of Microsoft -- the only other company to have crossed the $600 billion market capitalization level -- have risen only about 13 percent during the same period.

Hartch added that the high margins enjoyed by Apple are at risk of being eaten away by competitors through innovation and imitation, as has happened to Sony in the past.

However, Microsoft is backed by a well established franchise position, Hartch said.

"Microsoft's technology is an embedded component of corporate computing all around the world. There is still a lot of growth left in that."

Even if Microsoft is a second or third mover in newer areas of technology, its huge user base and community of developers give it the ability to take over most of the market eventually, said Michael Keller, who co-manages the fund with Hartch.

The company has a great balance sheet, and it is the world's largest software company and part of everyday life, Keller said.

The fund managers also said they were interested in web-based software maker Salesforce.com, but that they would only invest in the company at the right price.

"That is the company that has enterprise customers, a real franchise position that they have carved out, and the growth trajectory has been impressive," Hartch said.

The fund has a 13.5 percent exposure to information technology, with 2.2 percent of its money in Dell Inc and 2 percent invested in Automatic Data Processing.

Thomson Reuters' Lipper service has assigned the fund a 5 rating, the maximum possible, for total return, consistent return and tax efficiency.

BBH Core Select returned about 2.29 percent in March, short of the 3.29 percent returned by the S&P 500, its benchmark.

It added Internet search giant Google at the end of the last quarter. However, it has kept away from rival Yahoo Inc.

The fund managers said they were unlikely to invest in startups like Facebook -- which is in the process of going public -- as they tend to have a very anticipatory valuation.

Facebook will have to prove whether there will be a consistently strong path to free cash flow generation and it can begin to monetize the network asset it has, Hartch said.

The fund favors non-cyclical consumer companies with strong balance sheets and is bullish on financials.

However, it avoids utilities, airlines and wire-line telecommunication companies where demand is likely to fluctuate.

(Reuters)