Brown Advisory US Smaller Companies 26 November 2021

Brown Advisory US Smaller Companies (BASC) has made a strong start to its life under the new portfolio manager. Chris Berrier of Brown Advisory was named the new manager in late 2020, and management responsibilities transitioned on 1 April 2021 following the retirement of Jupiter’s Robert Siddles. As we discuss under the Performance section, the trust has outperformed under the new strategy, despite choppy markets.

Chris’s strategy uses bottom-up analysis to select the best long-term growth opportunities in the US small cap universe. His goal is to find companies with durable earnings, strong governance and good operational gearing and allow them to compound over time. As a result, Chris has constructed a portfolio of high-quality growth companies which should also perform well on the downside relative to the small cap universe – an ‘all-weather portfolio’ in Chris’ phrase.

If the proof of the pudding is in the eating, then the historic track record of the strategy in the open-ended space is one of strong outperformance and lower risk than the market. Since launch in 2007, the Brown Advisory US Smaller Companies UCITS fund that Chris manages has generated 2.25% of alpha per annum versus the Russell 2000 Growth Index (the open-ended fund benchmark), also outperforming the Russell 2000 Index (the benchmark of the trust).

Despite its recent outperformance and strong pedigree, BASC’s discount widened over the summer, and it was one of the cheapest trusts in the North America and North American Smaller Companies sectors until a rally in the shares brought the discount in to 1.9% as of 23/11/2021.

This looks like a great opportunity to get access to a premium strategy in an area of high growth potential on a small discount to NAV. Chris’s track record in the open-ended space is impressive, particularly given the difficulty of generating outperformance in the US market, which has long been documented. His success seems based on a repeatable process, with a clear definition of the sort of company in which he seeks to invest.

Chris has been helped by a stylistic tailwind for most of his tenure as a portfolio manager, with growth outperforming value. However, it is notable that he has outperformed the growth index as well as the style-neutral index during this period. In fact, in periods over the past two years it has been lower quality growth companies which have outperformed, including early-stage companies and more speculative business models – areas he typically avoids. In addition, since taking over management, the trust has also successfully dealt with a value rally – another headwind. BASC’s strategy will also come into its own when the market favours quality growth. We think this could be a feature of the post-pandemic markets now the euphoria of the reopening trade has worn off and economies have to rebuild. Notably quality outperformed globally in the aftermath of the 2007/2008 crisis.