Global Smaller Companies 09 February 2024
This is a non-independent marketing communication commissioned by Columbia Threadneedle Investments. 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.
The Global Smaller Companies Trust (GSCT) provides investors with a well-diversified, benchmark-agnostic allocation to the smallest end of the global equity markets. As discussed in Management, longstanding manager Peter Ewins will be retiring and handing over the reins to current joint portfolio manager Nish Patel at the start of the new financial year on 01/05/2024. Nish has worked with Peter and has become increasingly involved since he started working on the North American allocation in 2008. There are not expected to be any further changes to the well-resourced team, which has been bolstered by the wider resources available at Columbia Threadneedle Investments (CTI) following the acquisition of BMO EMEA by Ameriprise in 2021.
As discussed in Portfolio, Peter and Nish are focused on identifying high-quality, attractively valued companies to provide investors with a stylistically balanced, ‘core’ global smaller companies portfolio that can deliver growth over the long term. This includes direct exposure to equities in developed markets, including a 25% allocation to the UK, in addition to a short list of collectives providing exposure to Asian and emerging market smaller companies – currently 18% of the allocation.
As discussed in Performance, this approach has delivered sector-leading returns over the last three-year period generating 9.6% versus -16.2% from the AIC Global Smaller Companies sector. The quality of the underlying holdings is also reflected in their ability to generate sustainable cash flows across the market cycle. This has resulted in a significant improvement in revenue, prolonging GSCT’s 53-year track record of dividend growth (see Dividend).
GSCT currently trades on a Discount of 16.8% which is significantly wider than the trust’s five-year average of 9.4%.
In our view, GSCT’s strong performance over the past three years highlights the merits of an exposure to a well-diversified smaller companies strategy. This approach gives exposure to a variety of growth sources that may outperform during different stages of the market cycle, whilst helping to dampen any specific geographic and sector risks which may continue to prove valuable in a market that may struggle to find direction. Although Peter will be retiring at the end of the financial year, we believe it is unlikely there will be any significant change in the style of management given Nish’s involvement in the trust since 2008, and the support from the wider GSCT and CTI teams.
We also believe that the manager’s use of regional CTI smaller company specialists and in some cases external fund managers gives them an advantage in finding undervalued but high-quality investment opportunities. Given the current value in the smaller companies universe we believe this puts GSCT in a strong position to benefit should economic challenges ease and investor sentiment turn more positive – particularly given Peter and Nish’s increased exposure to more interest rate sensitive and quality growth areas of the market. The structural use of gearing should add further fuel to investors’ total returns. Given the 5% long-term discount target and active buyback policy, the historically wide discount may make this a very attractive long-term entry point.
- Discount wider than long-term average
- Extreme value across the smaller companies investment universe
- High yield versus peers, and 53 consecutive years of dividend growth
- Retirement of longstanding manager
- Valuation-driven investment approach, may lag in growthier markets
- Long-term structural use of gearing can exaggerate downside risk