BMO Global Smaller Companies 11 November 2020

BMO Global Smaller Companies Trust (BGSC) offers its investors a balanced and well-resourced approach to global smaller company investing. Under the management of Peter Ewins, the strategy invests in a manner that has not only helped the trust outperform its benchmark over the long term, but has done so in a risk-conscious way.

The investment process (outlined in the Portfolio section) does not follow any single approach to valuation and analysis, but rather leverages the broader smaller companies team at BMO, which consists of both analysts and small-cap fund managers. Each potential investment, which can be identified by any member, is debated by the wider team. It is through this wider group discourse that the portfolio is constructed. Peter also makes use of externally managed collective investments for Japan and the emerging markets, such as open- and closed-ended funds, leveraging members of BMO’s multi-asset and multi-manager teams to aid in identifying external managers.

As discussed in the Performance section, BGSC has generated a NAV return of 196.6% over ten years versus the benchmark’s return of 158%, and in doing so has fulfilled its primary objective. The trust is also one of The AIC’s ‘dividend heroes’, having consistently grown its dividend each year for the last 50 years, and currently yields 1.9%. The board operates an active approach to share buybacks, and BGSC has historically traded at a premium. However, BGSC now trades at an 9.0% discount, which Peter believes to be partly a result of the recent broader small-cap sell-off in combination with lower retail demand for the shares.

BGSC takes an interesting approach to small-cap investing. Rather than having a single transferable approach to analysis or being a one-man-band stock-picker, it utilises a collaborative process between members of the BMO global small-cap team. With this comes a wealth of experience and knowledge, considering that nearly all of the small-cap team are fund managers themselves. We believe this wealth of resources is a key selling point of BGSC, as well as dividend growth and a track record of outperformance versus its benchmark.

We think this approach is valuable when investing in global small caps. The universe is vast and idiosyncratic, and without a skilled team no manager can truly cover it. The portfolio is also diverse: although it is best characterised as ‘quality growth’, it has many defensive elements, as Peter seeks to balance the risks he is exposed to. It should be noted that when compared to the MSCI World Small Cap Index, BGSC has a relative structural bias to the UK, and away from the US, which has dominated recent returns. However, all trends eventually reverse, and after a period of UK underperformance and US outperformance it could be time to look to pick up cheap exposure to the UK. While it has traded at a small premium at times of greater risk appetite, BGSC now trades at a discount, which may present an attractive entry point – especially if a UK recovery comes.