Brown Advisory US Smaller Companies 28 April 2021

Jupiter US Smaller Companies (JUS) will be renamed Brown Advisory US Smaller Companies (BASC) in mid-May, subject to shareholder approval, after the mandate was taken over by the new manager on 1 April 2021. Chris Berrier heads up the Brown Advisory US Small Cap Growth team, and is the new lead manager. He has run the same strategy in the open-ended space since 2006, which has outperformed both the small cap Russell 2000 index and the Russell 2000 Growth. As discussed in performance, the Brown Advisory US Small-Cap Growth strategy’s performance over the past five years has been particularly strong, and it has continued its longer-term trend of generating above-market returns with below-market levels of risk.

Chris’ strategy is essentially a quality growth approach. He aims to find companies that can demonstrate consistent growth ahead of the market over the long run, typically via opening up a new market, dominating a niche, or having a differentiated business model or product. This is encapsulated by the proprietary concept of ‘3G’ – growth, governance and go-to-market, as discussed in performance.

The growth strategy is a departure from the value strategy implemented by the former manager, who announced his retirement last October. While most trusts in those sectors have since seen their discounts narrow, JUS’ discount remains wider than the sector averages at 5.9%. The only US small-cap peer is trading on a small premium.

As a part of the new management contract, the board has negotiated a fee cut, with the management fee falling by 5bps, and a tiered system introduced which will see it fall further as and when net assets grow. The trust does not pay a divided.

We think US small caps are at a potentially exciting entry point, with the progress of the vaccination programme, and state re-openings, giving the domestic US economy a boost. The coming stimulus package of the Biden administration should boost economic activity further, which should be disproportionately felt in the more domestic-facing small caps. Over the past few years, large caps have outperformed small caps, a ­­reversal of the long-run tendency in the US. Regulatory pressures on the large-cap tech stocks, as well as high valuations in some areas of the market, give reasons to doubt this trend will continue.

The arrival of the Brown Advisory US small-cap growth strategy into the closed-ended sector could therefore prove to be well-timed. Chris and the team bring with them an enviable pedigree, with long-term outperformance of their style index as well as the small-cap index, most impressively achieved with relatively low risk.

In our view, this has opened up a potentially interesting discount opportunity in the shares. The one US small-cap peer, JPMorgan US Smaller Companies (JUSC) is trading on a 3.5% premium while JUS is trading on a 5.9% discount. Yet the Brown Advisory US Small Cap Growth strategy has outperformed JUSC in recent years, and offers similar stylistic exposures. We think some unfamiliarity with the new manager, some delayed impact of the poor performance of the old manager, and the news of the manager change not spreading has led to this disparity.