Results analysis: Brown Advisory US Smaller Companies

• BASC has reported strong absolute returns in the year to the end of June 2021, during which period the board awarded the management contract to Brown Advisory after former manager Robert Siddles of Jupiter retired. On 07/05/2021 the trust’s name changed from Jupiter US Smaller Companies. 
• NAV total returns were 35.8% over the 12 months, compared to a total return of 45.1% for the Russell 2000 index of US small caps. The discount narrowed from 15.6% to 5.2%, and shares appreciated 52.6%.
• Christopher Berrier took over as manager on 1 April, after a comprehensive manager selection process implemented by the board following the previous manager’s retirement. Chris quickly aligned the portfolio with the US Small-Cap Growth Strategy he has run for over 15 years.
• The previous management style was more value-focused which led to underperformance of the small cap index during the pandemic and in the first three months of the 2021 financial year.
• From 1 April to 30 June the new quality growth strategy generated returns of 4.2% compared to 4.1% for the Russell 2000. BASC’s approach has worked well in the choppy markets since, with NAV total returns under the new manager to 26/10/2021 being 7%, considerably ahead of the 4% index returns.
• Chairman Stephen White commented: “We are pleased with the improved performance following Brown Advisory's appointment and look forward to Christopher's approach playing out over the long term. His focus on quality is an ever more important consideration alongside his rigorous approach to stock selection which results in a portfolio that is markedly different to the benchmark.”

Kepler View

BASC has made a strong start under the new manager, despite quite challenging markets with rotations in style and macro uncertainty abounding. Yet despite generating good absolute returns and outperforming its benchmark significantly, the trust has seen its discount widen to 9.9% (as of 28/10/2021). This may reflect some profit taking in the US and global markets after a strong reflationary rally and late summer worries about a winter COVID resurgence. We believe it could represent a good long-term entry point.

Chris’ strategy is to identify companies which can generate compound growth higher than the market over the long run. There is therefore a strong quality growth tilt to his style which contributes to attractive downside performance characteristics – something he explicitly targets. The focus on repeatable earnings and downside risk means there is a bias to companies with a track record and good cash generation, which means ‘meme stocks’ and profitless companies are unlikely to feature in the portfolio. Chris runs a highly active strategy, with an active share typically in the 90-95% range.

In our view, high quality businesses could be about to come into favour. After the exuberance of the reflationary rally, markets will have to contend with the post-pandemic reality. Companies and economies are having to deal with supply chain issues, rising inflation and the roll-off of government support schemes. Financially strong and stable businesses could find themselves in high demand.

While the strategy is new to the closed-ended space, Chris has been running it for many years in the open-ended space with success. Over the ten years to the end of August, the Brown Advisory US Smaller Companies UCITS Fund outperformed both the Russell 2000 Index and the Russell 2000 Growth index – indicating the approach added value over and above a simple growth strategy. The strategy returned 16.1% annualised over this period compared to 14.6% for the growth index and 13.2% for the style neutral index.

Over the longer term, we think a number of features of Chris’ approach increase the chance of him repeating the strong performance record. First is the high active share, which has been linked by academic research to a higher chance of long-term outperformance. Secondly, the process is very disciplined and consistent, which we believe is more likely to generate consistent results. Thirdly, the focus on downside risks should help reduce stock specific disappointments.

US small caps have been in the shadow of large caps for a number of years. The valuation differential is wide relative to history as a result, and we believe they are likely to be under-owned. BASC offers a way to gain access through a tried and tested approach with the shares trading significantly below par.

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