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Disclosure – Non-Independent Marketing Communication
This is a non-independent marketing communication commissioned by Brown Advisory US Smaller Companies. 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.
Earlier this year, we discussed the transition of the Brown Advisory US Smaller Companies (BASC) to its new management company and team.
In a matter of days, the trust’s newly appointed managers overhauled its portfolio almost entirely, retaining just two of the 37 stocks they inherited. As we outlined in a previous note, Brown Advisory is employing its tried and tested formula: their ‘three G’ approach to investing in US small-caps, which has proved successful in their long-established UCITS fund.
However, in a year which saw value perform very strongly - after a lengthy period of misery for value investors – the team’s growth-oriented approach could have proved controversial.
With that in mind, we thought it high-time we check in on BASC.
A strong start
While it is always worth noting that past performance is not predictive of future outcomes, so far progress is promising. Since the new managers were officially appointed on 1 April 2021 to 31 August 2021, the trust posted NAV growth of 6.3% and a share price total return of 7.1%, while the Russell 2000 Index – the trust’s benchmark – has been near flat over the same period. The trust also performed strongly relative to Morningstar IT North American Smaller Companies peer group, which has posted a share price total return of 2.9% over the same period.
At the same time, the trust currently sits on a discount of c. 10.8%, significantly wider than its investment trust peer group, giving investors access to this outperformance at a markdown.
So far, stock selection by the trust’s Baltimore-based management has been a key aspect of this success, with four of its five largest holdings significantly outperforming the benchmark. Here, we thought we would take a deeper dive into those holdings to give investors an insight into the types of companies that BASC invests in.
Vital ingredients
As a refresher, the trust’s lead manager, Chris Berrier, and his team look for companies displaying ‘3G’ characteristics. In practice, this means companies that have durable growth, sound governance and scalable go-to-market strategies. With this clear framework in place and an established portfolio, the team was able to transition the BASC portfolio rapidly after taking over.
Workiva is currently (as at 31 August 2021) the largest holding in the portfolio, with a 3.8% allocation. It is a SaaS (software-as-a-service) company, operating globally to provide cloud-based compliance and reporting functionality. In doing so it pulls data from across a disparate range of documents. As such, it has been an obvious beneficiary of the multi-year trend to migrate business systems online, with the pandemic rapidly accelerating this more recently.
The company boasts several high-profile clients, such as Google and Slack, reflecting its status as the leader in its sector. Since 1 April 2021, Workiva has seen its share price rise 51.99%.
BASC’s second-largest holding, Charles River Laboratories, couldn’t operate in a more different marketplace than Workiva, yet it reflects the manager’s focus on innovative solutions created by specialists in their markets. The company provides research tools and support services for drug discovery and development.
Similarly to Workiva, it is benefitting from long-term trends – in this case, the falling cost of drug production, which is encouraging more development activity – that have been further boosted by the pandemic. Since 1 April 2021, Charles River Laboratories’ share price has risen 50.89%.
Genpact is another digitally-focussed business services firm that has seen its growth accelerate under the changed work culture prompted by the pandemic. It provides digital solutions to improve client’s processes across a broad range of applications, from supply chain through to community management. Since 1 April 2021, Genpact’s share price has risen 20.38%, reflecting strong results in the first and second quarters.
A final meaningful position, which has also contributed to performance so far, is Waste Connections. While ostensibly waste management is not the most exciting opportunity discussed here, Waste Connections reflects the manager’s desire to blend earlier stage, higher growth companies with more established names that are still generating growth.
Waste Connections is currently the third-largest waste management company in the US and has continued to gradually expand through strategic acquisitions in states where its coverage is lower. It has also been boosted by returning demand as states have unlocked from pandemic shutdowns. Since 1 April 2021, Waste Connections’ share price has risen 18.52%.
Early riser
While it is still early days, the preliminary results of Brown Advisory’s approach to US smaller companies are encouraging for investors in BASC. US smaller companies represent some of the world’s strongest growth opportunities, with tomorrow’s mega caps sitting in the sector. By applying a consistent, proven process, BASC should continue to take advantage of these opportunities.
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