BMO Global Smaller Companies

BGSC is one of the few trusts to offer a truly diversified approach to global small caps, with an attractive discount and incoming tailwinds...

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This is a non-independent marketing communication commissioned by BMO Global Asset Management. The report has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is not subject to any prohibition on the dealing ahead of the dissemination of investment research.

BMO Global Smaller Companies

BMO Global Smaller Companies (BGSC) offers investors a diversified approach to global small-cap equity investing. BGSC is run by lead manager Peter Ewins, who is in turn supported by BMO’s wider global small-cap team. As highlighted in the Management section, the deep resources the team offer to Peter are an advantage for BGSC. Peter’s general approach to investing is best described as ‘quality growth at a reasonable price’, balancing small-cap growth investing with valuation sensitivity.

Peter believes that his balanced approach is becoming increasingly relevant in the current economic climate, reflecting his concerns about possible upwards pressures on inflation and corresponding potential over time for increases in interest rates. He believes such a scenario could become a major headwind to the more expensive end of the small-cap market, with some popular current thematic areas looking vulnerable to a pullback .

Yet he remains generally bullish on the outlook for small-cap stocks, highlighting the increased economic activity globally, especially in developed markets. Peter is currently upbeat about the UK, and the trust has presently got close to 30% exposure to this market. This optimism reflects the ending of Brexit uncertainty, generally attractive valuations in the market compared to elsewhere, which is being evidenced by a surge in recent takeover activity for small cap stocks here. We detail BGSC’s process and Peter’s outlook in more detail in the Portfolio section.

While BGSC’s continues its competitive long-term Performance, it has recently been the beneficiary of the outperformance of the UK small caps relative to global equities. BGSC has also celebrated its 51st year of consecutive Dividend increases (one of the longest records for any trust), and is currently yielding 1.1%. Despite its recent performance and the tailwinds supporting a valuation-sensitive approach to small caps, BGSC currently trades on a historically wide Discount.

Kepler View

We believe BGSC is an attractive ‘one-stop shop’ for global small-cap investing, offering arguably the only way to access a well-diversified portfolio of global small-cap equities in the closed-ended space. Small-cap investing can often carry with it enhanced risks due to the more volatile nature of the companies, and so investors seeking a broad small-cap exposure may be better served by utilising a well-diversified and measured approach like Peter’s. If investors follow a more concentrated or stylistic approach, they will likely increase the risk of being overexposed to a single factor or region. Peter highlights this may be a pitfall for those with large exposures to aggressive growth strategies, as they may be vulnerable in the event of tighter global monetary policies. Yet conversely, if we return to a market environment which clearly favours a single style or factor, as was the case in 2020, then BGSC may continue to underperform given its diversified approach.

BGSC’s structural overweight to the UK when compared to other global small cap funds, could be a tailwind in the near future, thanks to the low valuations and positive outlook for the region. The trust may also be less sensitive to a setback than peers if inflation worries persist or worsen. As a result, we believe that BGSC’s current discount may offer an attractive entry point. This is even more the case when we consider that for much of the last five years BGSC has traded on a small premium, reflecting the previously greater appetite for small-cap investing.

bull bear
Current discount offers an attractive entry point Can underperform in growth- or value-driven markets
Valuation sensitivity and large UK weighting may lead to near-term outperformance Relies on external managers for some regions, which adds additional manager risk
One of the longest records of dividend increases of any trust Addition of gearing can amplify losses on the downside
David Johnson
David is an investment trust analyst and joined Kepler in September 2020. Prior to this he ran multi-asset model portfolios at a discretionary fund manager, and has worked in both asset management and investment banking during his career. He holds a Masters in Finance from the University of Warwick and is a CFA charterholder.

Fund History

Disclaimer

This report has been issued by Kepler Partners LLP.  The analyst who has prepared this report is aware that Kepler Partners LLP has a relationship with the company covered in this report and/or a conflict of interest which may impair the objectivity of the research.

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