BMO Global Smaller Companies 16 February 2022
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BMO Global Smaller Companies (BGSC) offers investors a portfolio of global small-cap companies. Run by lead manager Peter Ewins, who works closely with the wider BMO Global small-cap team in constructing BGSC’s portfolio, the trust has a focus on identifying high quality companies with a ‘growth at a reasonable price’ (GARP) mindset. We think BGSC’s strong bias to the quality factor may put it in a favourable position for the coming inflationary environment. Peter is particularly concerned about the impact this change in market backdrop might have on very highly valued companies, as well as on those which may see their margins squeezed due to rising prices. He notes that high-quality companies which trade on reasonable valuations are likely to avoid said pressures, as we describe in detail in the Portfolio section.
While BGSC has underperformed its peers over the long term, in part due to its large UK allocation and avoidance of expensive growth stocks, it has been able to generate substantial outperformance over the last 12 months because the team’s valuation sensitivity has insulated the trust from the recent bear market. As we point out in the Performance section, BGSC’s ability to leverage ideas from an experienced team of smaller company portfolio managers has allowed it to benefit from a number of companies more than doubling in value over the last 12 months, many of which have been major drivers of BGSC’s recent returns.
BGSC currently trades on a 7.1% Discount, which is wider than its long-term average and wider than its peer group’s weighted average discount. Despite BGSC’s small-cap focus, it also has one of the longest track records of consecutive Dividend increases of any investment trust, at 51 years. It is also the only trust to pay a dividend in its sector, currently yielding 1.1%.
We believe that one of the key attractions of BGSC is its consistent application of a ‘growth at a reasonable price’ strategy. While this would have been a headwind for BGSC during 2020 when lower quality and more volatile growth stocks led the market, we believe that the current bear market is vindicating the team’s uncompromising approach. BGSC’s avoidance of both stretched valuations and companies whose balance sheets could be meaningfully impacted by rising inflation means we think the trust is currently much better positioned than peers with a lesser focus on quality.
While we think BGSC’s attractions are clear for valuation-conscious investors or those looking for investments better suited to a rising interest rate environment, we believe that the trust also has potential as a ‘one-stop shop’ solution to global small-cap investing. Given BGSC’s truly global remit and relatively balanced portfolio compared to peers, it offers investors exposure to a wide range of small caps, despite having a structural bias to the UK, where the weighting has been over 25% through 2021.
Given that both UK equities and core strategies have seen a resurgence in performance, we believe that BGSC’s current discount offers an attractive entry point. We also note that despite Peter’s valuation-conscious approach being relatively well positioned for the current inflationary environment, BGSC still trades at wider than its long-term average discount.
|GARP approach to quality small-cap investing may position the trust well for the current market
|Gearing, though modest, can enhance losses on the downside
|Fully utilises the experience and views of a range of professional investment managers
|Can underperform in markets driven by high-growth or deep-value stocks
|Discount may offer an attractive entry point
|Despite its long dividend track record, its yield may be too low for high-income investors