Global Smaller Companies 03 October 2024

The Global Smaller Companies Trust (GSCT) is a one-stop shop for exposure to smaller companies across the globe, and in our view the only trust offering truly diversified exposure across global small-cap markets, given the others have more specialist or stylistically focussed mandates. As discussed in the Management section, Nish Patel took over as lead manager in May, succeeding long-standing manager Peter Ewins. He works in a team of eight senior portfolio managers, including a number of regional desk heads, who assist him in selecting quality companies trading below their intrinsic value.

Nish had worked with Peter for over 15 years, so the basic strategy continues in the same form, but he has made his mark on the trust already. He made the key decision to reduce the use of third-party funds in order to improve stock-picking, lower costs, and increase concentration. The number of external Japanese small-cap funds has already been reduced to one, with half of the mandate awarded to the head of Japanese equities at CTI, who has been asked to produce a bespoke portfolio for GSCT. The aim is to fully insource this allocation over time. Additionally, Nish aims to further reduce the number of stocks in the portfolio below 200 and increase the size of the top stock positions.

GSCT pays a Dividend and, while a 1.72% yield may seem modest, the trust has an impressive 54-year track record of annual dividend increases. Over time, this has boosted the yield investors receive relative to their initial purchase to considerable levels.

Over the past three years, GSCT has delivered the best NAV total returns in the AIC Global Smaller Companies sector in what has been a difficult environment for small-caps. With the Fed and other central banks having cut interest rates in recent weeks, we think better days may lie ahead for the asset class.

In our view, GSCT is a strong candidate for a core holding to gain exposure to smaller companies globally. The trust covers both developed and emerging markets and is well-diversified across sectors. We think the trust offers attractive exposure to the growth characteristics of small-caps in a broad mandate which could suit many investors, with the additional and unusual (given the sector) benefit of a track record of longstanding dividend growth. The ongoing process to concentrate the portfolio and bring it in-house is a positive development in our view and increases the potential for the trust to add alpha over time.

Nish is mindful of the riskier nature of smaller companies, and this is reflected in his investment philosophy. His focus on attractively valued quality businesses aims to provide a margin of safety while allowing shareholders to benefit from the exceptional long-term growth potential in smaller businesses. We think this approach will appeal to investors seeking exposure to the higher growth potential of smaller companies and who are conscious of the volatility associated with the asset class.

GSCT has a 54-year track record of increasing its dividend annually and we believe it is an important feature of the trust. Dividends can provide a cushion in down markets, during which small-caps tend to be more affected than large-caps, while the high dividend growth GSCT has displayed means that a yield on an initial investment can grow quickly to considerable levels. Costs are likely to decrease over time due to plans to reduce the number of third-party funds in the portfolio, though we note that GSCT is already one of the cheapest options in the AIC Global Smaller Companies sector.