Strategic Fixed Income

THE CASE FOR Strategic Fixed Income

ABSOLUTE RETURN THROUGH THE CREDIT CYCLE

Traditional bond-like returns with low interest rate correlation and lower volatility than high yield Bond investors want many things from bonds: income, diversification, liquidity and outperformance. One goal consistently rises above others: stability. TheBrown Advisory Strategic Bond Strategy is designed to provide stability—even when rates rise. We do so by consistently optimizing the portfolio’s risk-adjusted return using deep fundamental research in conjunction with proprietary, factor-based risk pricing. Our model translates qualitative work into a quantitative output to help us price risk with more precision. Through disciplined adherence to this process, we believe we make consistently better decisions by minimizing the impact of behavioral biases.

Pricing Risk Bottom-Up Sector Allocation Keep It Simple

We use deep due diligence to We avoid macro bets by allocating We build low-duration portfolios identify and assess a bond’s risk. capital from the bottom up. Our through cash bonds, with a Coupling downside analysis on every proprietary approach integrates straightforward hedging strategy investment with a factor-based security selection with both sector using futures. Our liquidity focus model that calculates impairment allocation and risk sizing decisions. We ensures that investors do not have risk allows us to price risk on an overlay a risk management process to to choose between opportunistic absolute and relative basis. limit volatility and correlation. investing and capital availability.

Low Correlation to Interest Rates We seek to consistently manage the strategy to have a duration between one and two years. These efforts have resulted in virtually no correlation to the Bloomberg Barclays U.S. Treasury Bond Index

CORRELATIONS VS. OTHER ASSET CLASSES (04/01/2015–06/30/2018)

Bloomberg Bloomberg Barclays Bloomberg Barclays Brown Advisory Barclays U.S. Intermediate U.S. Aggregate Bond S&P 500® Index Strategic Bond Strategy Treasury Bond Aggregate Bond Index Index Index Brown Advisory 1.00 Strategic Bond Strategy Bloomberg Barclays U.S. Treasury 0.03 1.00 Bond Index Bloomberg Barclays Intermediate 0.20 0.96 1.00 Aggregate Bond Index Bloomberg Barclays Aggregate Bond 0.28 0.95 0.98 1.00 Index

S&P 500® Index 0.47 -0.26 -0.18 -0.06 1.00

...With Lower Beta Than High Yield Three-Year Beta Our approach seeks to allocate capital to the best risk-adjusted opportunities at all times. In periods of narrowing spreads, we maintain a low allocation to high yield and increase our allocation as excess spread improves. Our rigorous underwriting process High U.S. helps to ensure the portfolio represents our best ideas. This process Yield Treasury attempts to maximize our return for each unit of risk we take. The desired result is achieving lower beta relative to interest rate movements and high-yield bonds. 0.15 0.15

Identify & Assess Evaluate Probability Downside Price Risk Asset Allocation/ With every of Default We run every bond Our downside Risk Sizing potential Our proprietary through a downside calculation assigns We allocate capital investment, + risk-pricing model + scenario to help us + a probability of + to the best risk- we begin with generates an manage through periods impairment and adjusted opportunities fundamental due estimated default of volatility. Within a allows us to calculate at all times. Our diligence of cash probability. modeled default, we a bond’s excess models help us make flow, structure and account for corporate spread accordingly. repeatable, objective valuation. structure, relative This metric helps us decisions based on capital structure priority, evaluate and compare data. We size all bonds indenture covenants and the risk-return profiles to the downside precedent restructuring of bonds across determined by our multiples to produce a disparate sectors, analysis. loss given default. maturities and credit qualities.

Managing Rate Exposure Using Multiple Fixed Income Sectors To adjust for interest rate risk, we measure the amount of excess spread that we expect to earn for each year of duration. We call this metric DAZ-EL (Duration-Adjusted Z-Spread minus Expected Loss), and we use it in conjuction with other tools to further optimize risk-adjusted return. Our portfolio incorporates a broad array of fixed income securities designed to manage interest rate risk.

INSTRUMENT USE CASE

Treasury Futures We directly hedge against rising rates by using Treasury futures. Hedging strategies can carry specific risks; our approach uses highly liquid, exchange-traded Treasury futures. These generally provide a transparent and flexible method for countering the portfolio’s interest rate risk.

Amortizing Bonds Some bonds actively pay back principal over their term, such as asset-backed car loan bonds. Most of these loans are originally five or six years; the securitized bonds that we buy typically pay off within two years. Because these bonds rapidly return principal, they tend to be more stable and less sensitive to rising rates. In rising rate environments, we also benefit from the return of principal that we can reinvest at higher yields.

Floating-Rate The coupon rates of these bonds periodically reset based on short-term interest rates, which are usually Bonds tied to LIBOR. Because of this, their prices are less sensitive to long-term interest rates.

Our allocations reflect 100%100% our philosophy of seeking 90%90% the most attractive risk- 80%80% adjusted returns. 70%70% MUNI 60%60% CMBS Portfolio Allocations RMBS EQ 50%50% IO 06/30/2015 - ABS CORP 06/30/2018 40%40% Hedge CLO

30%30%

20%20%

10%10%

0%0% MUNI CMBS RMBS EQ IO ABS CORP Hedge CLO

Source: Bloomberg® for correlations and betas. Data shown are as of 06/30/2018. The portfolio information above is based on a representative Strategic Bond account and is provided as supplemental information. Please see the Brown Advisory Strategic Bond Composite performance disclosure on the last page for additional information and a complete list of terms and definitions. 2 / JUNE 2018 THE CASE FOR STRATEGIC FIXED INCOME Opportunistic Allocations Reflect Best Unconstrained Portfolio, Traditional Thinking Liquidity We draw from the best thinking of our fixed income, equity We believe an investment in our strategy does not trade and private equity teams to identify, source and allocate to liquidity for yield. We measure the amount of expected high-conviction ideas. Our unconstrained nature allows us to return (DAZ-EL) that we are getting relative to each invest tactically based on valuation and market characteristics. position’s liquidity score and to ensure that the overall strategy maintains adequate liquidity using this framework: Government/Tax-Exempt Securities -50% to 50% Securitized Products 0% to 150% Size of Issue Number of Involved Parties High Yield Credit 0% to 50% Investment Grade Corporates 0% to 50% Depth of Bid/ Historical Trade Offer Activity

EXPERIENCE AND EXPERTISE TY ANDREWS THOMAS D.D. GRAFF, CFA KELLY MCCONKEY TORY SZCZAWINSKI The Brown Advisory Fixed Income team has an Portfolio Analyst Head of Fixed Income, Portfolio Analyst Securitized Products Analyst Portfolio Manager average of 16 years of experience working with TOM BANDUROWSKI JOSHUA PERRY, CFA, CAIA, DAVID THOMPSON, CFA, CFP Credit Analyst AMY HAUTER, CFA FRM Portfolio Manager a variety of institutional and private clients. We Associate Portfolio Manager Associate Portfolio Manager PAUL CORBIN ESG Research Analyst Credit Analyst JASON VLOSICH manage approximately $3.6 billion in fixed Portfolio Manager Associate Portfolio Manager income client assets as of June 30, 2018. Analyst and Trader JAMES DAVIE, CFA JOHN HENRY IUCKER STEPHEN SHUTZ, CFA Credit Analyst Associate Portfolio Manager Portfolio Manager Securitized Products Analys LYN WHITE, CFA ROBERT SNYDER III Credit Analyst KATHERINE LEE Portfolio Manager Credit Analyst

As of June 30, 2018, Brown Advisory managed approximately $3.6 billion in fixed income client assets for the following entities: Brown Advisory, LLC, Brown Investment Advisory & Trust Company, Brown Advisory Securities, LLC, Brown Advisory Ltd., Brown Advisory Trust Company of Delaware, LLC, Brown Advisory Investment Solutions Group LLC and Meritage Capital LLC. Brown Advisory Strategic Bond Strategy As Of 06/30/2018 STRATEGY INCEPTION: 09/30/2011 | PORTFOLIO MANAGERS: ROBERT SNYDER AND THOMAS D.D. GRAFF, CFA BLOOMBERG SECTOR REP. BLOOMBERG BARCLAYS INTERMEDIATE BARCLAYS COMPOSITION ACCOUNT AGGREGATE BOND INDEX INTERMEDIATE PORTFOLIO REP. AGGREGATE Cash & Equivalents -11.7 -- ATTRIBUTES1 ACCOUNT BOND INDEX Treasuries/U.S. Agencies -- 43.2 Avg. Credit Quality A2 AA1/AA2 Securitized 69.5 36.4 Effective Duration (yrs) 1.8 4.3 Corporates 35.5 20.4 Yield to Worst (%) 4.0 3.2 Avg. Life (yrs) 6.1 5.4 Municipals 6.5 -- CREDIT QUALITY1 Other 0.2 -- AAA/Aaa 20.4 77.2 Source: FactSet®. The portfolio information above is based on a representative Strategic Bond account and is provided as supplemental information. Data shown are as of 06/30/2018. Securitized sector weights include Mortgage-Backed Securities (MBS), Commercial MBS and Asset-backed Securities (ABS). Sector AA/Aa 14.5 3.4 diversification include cash and equivalents. Cash balance can be negative to reflect economic exposure to derivatives and other forward contracts. A 12.2 9.0 BROWN ADVISORY STRATEGIC BOND COMPOSITE PERFORMANCE AS OF 06/30/2018 BBB/Baa 28.8 10.4 STRATEGIC BOND COMPOSITE (NET OF FEES) BLOOMBERG BARCLAYS INTERMEDIATE AGGREGATE BOND INDEX High Yield 21.0 --

2.0 Other 3.1 -- 2 2 1.8 1.8 1.7 1 1.5 DURATION DISTRIBUTION 1.3 Less than 1 Year 36.8 0.1 1.1 1 1 1 to 3 Years 25.0 27. 3

3 to 5 Years 27. 1 31.5

0.2 0.1 0.2 5 to 7 Years 8.8 33.4 0 0 7 to 10 Years 2.3 7.7

PERFORMANCE (%) -0.3 Greater than 10 Years -- --

1Source: FactSet®. Data shown are as of 06/30/2018. The portfolio information -1 -1 above is based on a representative Strategic Bond account and is provided as -1.0 supplemental information. Portfolio level information includes cash and cash 3 Mos. YTD 1 Year 3 Year 5 Year ITD (09/30/2011) equivalents. Fixed income sectors, quality distribution and duration distribution may not total 100% due to rounding. Please see the Brown Advisory National Source: FactSet®. Returns shown are through 06/30/2018 for each period. All returns greater than one year are annualized. Past performance is not indicative Municipal Bond Composite performance disclosure on the last page for additional of future results. The composite performance shown above reflects the Strategic Bond composite, managed by Brown Advisory Institutional. Brown Advisory information and a complete list of terms and definitions. Institutional is-2 a GIPS compliant firm and is a division of Brown Advisory LLC. Please see the end of this presentation for a GIPS compliant presentation. 3 / JUNE 2018 THE CASE FOR STRATEGIC FIXED INCOME About Brown Advisory

Brown Advisory is a leading independent investment firm that offers a wide INSTITUTIONAL AND INVESTMENT CONSULTANTS range of solutions to institutions, corporations, nonprofits, families and Christopher “Topher” Fearey [email protected] | (410) 537-5549 individuals. Our mission is to make a material and positive difference in the lives About Brown Advisory of our clients by providing them first-rate investment performance, customized FINANCIAL INTERMEDIARIES strategic advice and the highest level of personalized service. Matt Pedicino [email protected] | (443) 873-5252 We follow a philosophy that low-turnover, concentrated portfolios derived from sound bottom-up fundamental research provide an opportunity for attractive ENDOWMENTS AND FOUNDATIONS performance results over time. We have a culture and firm equity ownership Doug Godine, CFA structure that help us attract and retain professionals who share those beliefs, [email protected] | (410) 537-5585 and we follow a repeatable investment process that helps us stay true to our philosophy.

Brown Advisory Strategic Bond Composite GIPS Composite 3-Yr Benchmark 3-Yr Composite Assets Composite Total Gross Composite Total Net Portfolios in Composite Composite Dispersion Firm Year Benchmark Returns (%) Annualized Standard Annualized Standard ($USD Returns (%) Returns (%) at End of Year (%) Assets Deviation (%) Deviation (%) Millions) ($USD Millions)

2017 4.3 3.3 2.3 N/A N/A Five or fewer N/A 126 33,155

2016 5.1 4.1 2.0 N/A N/A Five or fewer N/A 60 30,417

2015** -1.9 -2.6 -0.1 N/A N/A Five or fewer N/A 45 43,746

**Partial Year Period - 4/31/2015 through 12/31/2015

Brown Advisory Institutional claims compliance with the Global Investment Performance Standards (GIPS®) and has prepared and presented this report in compliance with the GIPS standards. Brown Advisory Institutional has been independently verified for the periods from January 1, 1993 through December 31, 2017. The Verification reports are available upon request. Verification assesses whether (1) the firm has complied with all the composite construction requirements of the GIPS standards on a firm-wide basis and (2) the firm’s policies and procedures are designed to calculate and present performance in compliance with the GIPS standards. Verification does not ensure the accuracy of any specific composite presentation. GIPS® is a registered trademark owned by CFA Institute.

1. *For the purpose of complying with the GIPS standards, the firm is defined as Brown Advisory Institutional, the management fee schedule is as follows: 0.375% on the first $10 million; 0.25% on the next $15 million and 0.20% on Institutional and Balanced Institutional asset management divisions of Brown Advisory. As of July 1, 2016, the firm was the balance over $25 million. Further information regarding investment advisory fees is described in Part II A of the redefined to exclude the Brown Advisory Private Client division, due to an evolution of the three distinct business lines. firm’s form ADV. Actual fees paid by accounts in the composite may differ from the current fee schedule. 2. The Strategic Bond Composite includes all discretionary portfolios which seek to achieve capital appreciation and 7. The three-year annualized ex-post standard deviation measures the variability of the composite (using gross returns) income with a low correlation to interest rate movements. This is accomplished by investing at least 80% of the value and the benchmark for the 36-month period ended on December 31. The 3 year annualized standard deviation is not of its net assets in a broad set of fixed income securities, such as U.S. Government securities, corporate fixed income presented as of December 31, 2015, December 31, 2016 and December 31, 2017 because the 36 month returns were securities, high yield bonds, bank loans and collateralized loan obligations, tax-exempt municipal bonds, U.S. Treasury not available for the composite (N/A) bonds, Treasury inflation-protected securities (TIPS), mortgage-backed and asset-backed securities, and derivatives. 8. Valuations and performance returns are computed and stated in U.S. Dollars. All returns reflect the reinvestment of The portfolios in the composite are not managed to a benchmark or limited by maturity, sector, quality or geography. income and other earnings. The minimum account market value required for composite inclusion is $2 million. 9. A complete list of composite descriptions, policies for valuing portfolios, calculating performance, and preparing 3. This composite was defined and initially created on April 1, 2015. compliant presentations are available upon request. 4. The benchmark is the Bloomberg Barclays Intermediate Aggregate Bond Index. This index is an unmanaged index 10. Past performance is not indicative of future results. that consists of 1-10 year governments, 1-10 year corporates, all mortgages, and all asset-backed securities within 11. This piece is provided for informational purposes only and should not be construed as a research report, a the Aggregate Index. An investor cannot invest directly into an index. Bloomberg Barclays Indices are trademarks of recommendation or suggestion to engage in or refrain from a particular course of action or to make or hold a particular Bloomberg or its licensors, including Barclays Bank PLC. Benchmark returns are not covered by the report of the investment or pursue a particular investment strategy , including whether or not to buy, sell or hold any of the independent verifiers. securities mentioned, including any mutual fund managed by Brown Advisory. 5. The composite dispersion presented is an equal-weighted standard deviation of portfolio returns calculated for the 12. Some portfolios may utilize derivative securities. To date, any derivatives used have been CMOs and range accrual accounts in the composite for the entire calendar year period. The composite dispersion is not applicable (N/A) for notes. Any CMO at the time of purchase must pass the FFIEC volatility tests. periods where there were five or fewer accounts in the composite for the entire period. 13. Duration is a measure of interest rate risk. 6. Gross-of-fees performance returns are presented before management fees but after all trading commissions, and 14. The use of derivatives is integral to the investment process. Futures and swaps are utilized within the strategy and gross of foreign withholding taxes (if applicable). Net-of-fee performance returns reflect the deduction of actual comprise up to 100% of the strategy. The strategy may employ leverage, but is not integral to the investment process. management fees and all trading commissions. Other expenses can reduce returns to investors. The standard Shorting is not utilized.

Terms and Definitions for Representative Account Calculations FactSet® is a registered trademark of FactSet Solutions LLC. BLOOMBERG is a trademark and service mark of Bloomberg Finance L.P., a Delaware limited partnership, or its subsidiaries. FactSet® is a registered trademark of FactSet Research Systems, Inc. Effective Duration is a time measure of a bond’s interest-rate sensitivity, based on the weighted average of the time periods over which a bond’s cash flows accrue to the bondholder.Yield to Worst is calculated by making worst-case scenario assumptions on the issue by calculating the returns that would be received if provisions, including prepayment, call or sinking fund, are used by the issuer. Average Life is the period of time for all principal dollars to be returned to investors. Alpha takes the volatility (price risk) of an investment and compares its risk-adjusted performance to a benchmark index. The Bloomberg Barclays U.S. Treasury Index is an unmanaged index of public obligations of the U.S. Treasury with a remaining maturity of one year or more. The Bloomberg Barclays Intermediate Aggregate Bond Index is an unmanaged index that consists of 1-10 year governments, 1-10 year corporates, all mortgages, and all asset-backed securities within the Aggregate Index. The Bloomberg Barclays U.S. Aggregate Bond Index represents securities that are SEC-registered, taxable, and dollar denominated. The index covers the U.S. investment grade fixed rate bond market, with index components for government and corporate securities, mortgage pass-through securities, and asset-backed securities. Bloomberg Barclays US Corporate High Yield Bond Index measures the dollar-denomiated, high yield, fixed-rate corporate bond market.. Bloomberg Barclays Indices are trademarks of Bloomberg or its licensors, including Barclays Bank PLC. The S&P 500® Index represents the large-cap segment of the U.S. equity markets and consists of approximately 500 leading companies in leading industries of the U.S. economy. Criteria evaluated include: market capitalization, financial viability, liquidity, public float, sector representation, and corporate structure. An index constituent must also be considered a U.S. company. Standard & Poor’s, S&P, and S&P 500 are registered trademarks of Standard & Poor’s Financial Services LLC (“S&P”), a subsidiary of S&P Global Inc. An investor cannot invest directly into an index.

The views expressed are those of the author and Brown Advisory as of the date referenced and are subject to change at any time based on market or other conditions. These views are not intended to be and should not be relied upon as investment advice and are not intended to be a forecast of future events or a guarantee of future results. Past performance is not a guarantee of future performance and you may not get back the amount invested. The information provided in this material is not intended to be and should not be considered to be a recommendation or suggestion to engage in or refrain from a particular course of action or to make or hold a particular investment or pursue a particular investment strategy, including whether or not to buy, sell, or hold any of the securities mentioned. It should not be assumed that investments in such securities have been or will be profitable. To the extent specific securities are mentioned, they have been selected by the author on an objective basis to illustrate views expressed in the commentary and do not represent all of the securities purchased, sold or recommended for advisory clients. The information contained herein has been prepared from sources believed reliable but is not guaranteed by us as to its timeliness or accuracy, and is not a complete summary or statement of all available data. This piece is intended solely for our clients and prospective clients, is for informational purposes only, and is not individually tailored for or directed to any particular client or prospective client.

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