Brown Advisory US Smaller Companies 27 February 2023

Brown Advisory US Smaller Companies (LON:BASC) provides investors with core small-cap exposure to US equities, with a weighted average market capitalisation of $6.8bn. BASC is run in a risk-controlled manner, with the managers seeking to add value by compounding over many years. BASC is managed by Chris Berrier and he is supported by associate portfolio manager George Sakellaris. Chris instigated the process used to manage BASC upon joining Brown Advisory over 17 years ago, and manages $6.7bn in the same strategy for other clients. The team’s long-term approach over this timeframe has been to focus on quality growth companies with one eye on valuation and, as such, the portfolio typically has lower debt, higher return on capital and higher growth prospects than the average small cap. The team has a long-term track record of outperforming in an asset class which itself has outperformed US large-cap equities over long periods of time.

BASC’s objective is capital growth and it does not specifically target companies that pay a dividend. As such, it does not usually pay a dividend itself. BASC has not employed gearing under Brown Advisory’s tenure, which began in April 2021, although this is a consequence of market conditions, rather than a permanent decision not to deploy gearing. Given that BASC’s investment strategy is designed as a core small-cap mandate, it is likely that any gearing deployed in future will be modest.

BASC currently trades at a 12% discount, a little wider than average. BASC has a triannual continuation vote, with the next vote likely to be in October 2023.

BASC offers investors exposure to small and mid-sized companies in the world’s largest equity market and, arguably, one of the most dynamic economies. As Chris points out, smaller companies can be more volatile and this is something investors should keep in mind but, within that context, BASC’s careful approach to risk and position sizes means it can be considered a core holding which aims to deliver positive returns when smaller companies generally are doing so. Brown Advisory’s appointment in April 2021 came at a time when, arguably, its quality-focused investment philosophy was out of favour, which speaks to a level-headed decision by BASC’s board not to chase recent past performance when seeking a new manager. The early signs are that Chris and the team’s consistent approach to quality is beginning to show through and, in our view, quality and valuation are likely to be important factors in active equity portfolios in a higher interest rate environment, where money is no longer cheap.

BASC’s current discount of c.14% , while not excessive, is wider than its long-term average and may be a reflection of the fact that US smaller companies’ equities have not been particularly front of mind for investors when US large cap equities have done so well in recent years. Longer term, smaller companies can provide outperformance and with changing market conditions, this may be an attractive entry-point discount.