BMO Global Smaller Companies 19 July 2021

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.

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.