Brown Advisory US Smaller Companies 01 July 2022

Brown Advisory US Smaller Companies (BASC) offers access to a portfolio of high-quality growth companies in the US small cap market, which brings exposure to the long-term growth potential in the dynamic US economy.

The portfolio is managed by Chris Berrier of Brown Advisory, who took over management responsibilities on 01/04/2021. As we discuss under Performance, Chris’ long-term track record running similar strategies is outstanding. In particular, while outperforming his funds have tended to display a low beta and less downside sensitivity than the market. This has led to the trust holding up much better than the Russell 2000 Growth Index in the sell-off seen this year.

Chris aims to find companies which can display the ‘3G’ characteristics of Growth, Governance and scalable Go-to-market. He avoids loss-making and speculative businesses, which has been key to outperforming the Russell 2000 Growth Index this year.

It has been a bad year for markets, with high inflation and the Russian invasion of Ukraine being key reasons. BASC’s Discount has widened out to c. 13%, compared to a five-year average of c. 9%. BASC’s discount is one of the widest in the combined peer group of US large and small cap strategies, despite the good long-term track record of the manager. Chris tells us that valuations have already become much more interesting in a number of areas of the market, and he is looking to put some cash to work in defensive tech and healthcare companies which have sold off. That said he is not trying to call the market, but taking a long-term view on the companies’ prospects.

We think Chris’ long-term track record is impressive and BASC offers an intriguing way to get access to the long-term growth potential in the US, the world’s largest economy and the major source of creativity and dynamism. Chris’ success seems based on a repeatable process, with a clear definition of the sort of company in which he seeks to invest, which gives us some comfort that his alpha-generation could be repeatable too.

Turning to the short-term, this has been a bad year for growth investing, but BASC has held up well thanks to the focus on quality and resilience baked into Chris’ strategy. The immediate outlook for markets looks troubled, but the wide share price discount looks ever more interesting, as is the fact Chris is starting to find attractively valued opportunities in some of the areas that have sold off. Chris acknowledges a wide range of outcomes is still possible in the coming months, but he is confident enough to be putting some cash to work. Even though the shake-out has been worst felt in unprofitable businesses, Chris believes it should provide opportunities in high-quality businesses as some investors are forced to exit indiscriminately and some high-quality companies fall back into the small cap space as the market cap shrinks. There is also the potential for M&A as companies look to take advantage of each others’ weaknesses, and this could provide a diversified source of returns.