The lost decade for equities persisted into 2011, with the S&P 500 concluding a volatile year with a flat return.

Despite the broad market’s lackluster performance, BBH Core Select (BBTRX) returned 5.5 percent last year and 4.4 percent annually over the past decade. The fund’s trailing 10-year performance beat the S&P 500 by a wide margin, earning it a ranking in the top decile of Morningstar’s Large-Cap Blend category. Even better, the fund produced these returns while incurring less volatility than the broad market.

There’s an important lesson to be learned from the fund’s success.

In a volatile market in which equities have struggled to produce gains, investors are still susceptible to marketing pitches that promise long-term, market-beating returns without incurring substantial losses during downturns. In recent years, fund companies have launched numerous specialty/alternative funds that attempt that very feat by using absolute return, long-short or market neutral strategies.

But according to Morningstar’s data, alternative mutual funds underperformed the market in 2011 and investors would have been better off simply holding shares of an S&P 500 index fund. The average market neutral fund declined 0.3 percent last year, while the average long-short fund dropped by almost 3 percent. That’s an excellent example of how a clever investing strategy can still lag the market.

By contrast, BBH Core Select’s management team achieved their market-beating returns by eschewing trendiness in favor of a time-tested investment strategy: They buy high-quality companies that trade at discounts to their valuations.

The trio of fund managers selects businesses that offer essential products and services and are established leaders in attractive industries. Additionally, they look for management teams that are skillful allocators of capital and have a significant ownership stake in their firm. Beyond that, businesses must have solid balance sheets, ample free cash flow and high returns on capital. At any given time, there are generally between 150 to 200 companies that fulfill those fundamental criteria.

After performing this initial screen, the management team estimates the intrinsic value of the top companies that meet their criteria, and then only buys those companies’ shares when they trade at a 25 percent discount to their valuation. Management makes its purchases at steep discounts to not only ensure plenty of upside potential, but to also enjoy a margin of safety.

That approach means the fund has a concentrated portfolio of between 25 to 30 positions in high-quality names such as Nestle (OTC: NSRGY), Baxter International (NYSE: BAX), US Bancorp (NYSE: USB) and Diageo (NYSE: DEO). With an annual portfolio turnover of just 17 percent, management tends to hold positions for the long term. The fund managers only sell positions once they approach their estimate of intrinsic value or their investment thesis no longer holds true.