Global Smaller Companies 02 August 2023
Disclaimer
This is a non-independent marketing communication commissioned by Columbia Threadneedle Investments. The report has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is not subject to any prohibition on the dealing ahead of the dissemination of investment research.
The Global Smaller Companies Trust (LON:GSCT) offers investors exposure to the growth potential in a truly diverse range of smaller companies listed all over the world. Approximately 80% of the portfolio is invested directly in equities in the UK, North America, and Europe, whilst around 20% is allocated to funds in regions requiring more specialist knowledge, such as the emerging markets, Asia, and Japan which provide an alternative source of alpha (see Performance).
As discussed in Management, GSCT’s investment team is well-resourced, with longstanding lead manager, Peter Ewins, supported by a team of regional specialist portfolio managers and dedicated investment analysts. This team is further bolstered by the wider resources available at Columbia Threadneedle Investments following the acquisition of BMO EMEA in 2021, and this includes specialist fund managers and analysts in key markets providing access to opportunities that, especially for retail investors, may otherwise be hard to access.
As discussed in Portfolio, GSCT offers a more core, balanced, and valuation-focussed exposure, with an emphasis on investing in high-quality, well-managed companies. This differentiates the trust compared to alternative growth strategies in the peer group as Peter follows a bottom-up investment process to seek out opportunities capable of delivering growth at a reasonable price rather than any price. This has led to strong performance relative to the growthier peer group over the shorter term, alongside a record level of income received from the underlying holdings which increased by 25% y-o-y - securing the trust’s record of Dividend growth for over 53 consecutive years. GSCT is the only trust in the AIC Global Smaller Companies sector to pay a dividend.
The board are keen to employ Gearing across the market cycle to ensure they benefit in rising markets. Currently, GSCT is trading on a historically wide Discount of 15.7%, significantly wider than the five-year average of 8%.
In our view, GSCT is an attractive way to invest for growth. Over the long-term smaller companies typically outperform, particularly following a recession, and despite small companies facing a challenging couple of years, we believe Peter’s valuation-sensitive approach could offer significant upside in any recovery. The Gearing adds to this recovery potential. In the interim, the focus on identifying companies that are cash-flow generative with strong balance sheets that are less exposed to the high and rising cost of debt could fare better in this environment compared to more speculative, high-growth strategies (see Performance).
We note the board’s active buyback policy may provide some support for the historically wide Discount, with the target being sub 5% in normal market conditions. Whilst it may take some time for the current poor sentiment in markets to shift, we think the current wide discount may offer great value over the long term.
Bull
- Currently trading at a historically wide discount
- Diverse exposure to global smaller companies reduces exposure to any single factor risk
- Increased investment capabilities through the wider Columbia Threadneedle Investment team
Bear
- A more valuation-sensitive approach may underperform in a growth-driven environment
- Although gearing can enhance performance, it can also exaggerate downside risk
- Use of third-party fund managers may dilute accountability
Fund History
