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- In the twelve months to 30/06/2024, Brown Advisory US Smaller Companies’ (BASC) NAV increased by 2.8%, relative to a 10.7% rise in the sterling-adjusted Russell 2000 Total Return Index. BASC’s share price rose by 5.1% over the same period, marking a slight narrowing of the discount from 14.8% to 12.8%. BASC’s discount has subsequently narrowed further to c. 12%.
- Brown Advisory took over managing the portfolio in March 2021 and has achieved a NAV increase of 6.4% in the three-year period to 31/03/2024, compared to 8.9% for the benchmark index.
- Factors contributing to performance included smaller companies lagging their larger US peers for the third consecutive financial year, BASC’s underweight position in financials (which rallied in late 2023) and negative earnings surprises in a small number of healthcare and information technology portfolio companies.
- The board amended BASC's share buyback policy last year, with the aim of reducing discount volatility and working to reduce any discount in the event of it being significantly wider than similar investment trusts. As the discount remained largely within the board’s tolerated range, the trust repurchased 90,000 shares during the year.
- The board decided not to deploy gearing during the year due to the rise in interest rates, a mixed earnings outlook and limited investor interest in the sector. If prospects for the smaller company sector and investor interest improves, the board will review its gearing policy which is one of the key benefits of a closed-ended structure.
- Chair Stephen White said “After a period of dull returns from US small caps, we see a more favourable picture going forward. At the same time, we also see a return to the fore of our manager’s investment style with its focus on earnings analysis, cash flow generation and balance sheet quality, rather than on speculation and momentum. We believe our portfolio is well placed to take advantage of this situation.”
Kepler View
US large-caps continued to outperform in the year to 30/06/2024, with the S&P 500 delivering a total return of 25% (in US dollars), significantly above the 10% return from the Russell 2000 Total Return Index. A key driver was the perceived direction of US interest rates, with reticence from the Fed to start cutting rates weighing on the valuation of small-cap equities while investors flocked to the perceived AI exposure of the magnificent seven.
That said, the outperformance of the US large-cap sector has been driven by a small number of companies, with concentration by weight and returns hitting their highest levels in some time. Historically, a sharp increase in concentration has often been followed by a steep reversal and period of superior performance by small-caps. Given the individual market caps of Apple and NVIDIA currently exceed the value of the whole of the Russell 2000 index, a relatively small shift in investor sentiment away from the magnificent seven could provide a significant tailwind for returns in the small-cap sphere.
Manager Christopher Berrier believes that the weight of passive funds has also propped up lower-quality companies in the sector, which presents an opportunity for stock-pickers once the focus returns to company fundamentals. Small-cap valuations remain below historic levels and their large-cap peers, providing the opportunity to find attractively-valued companies in a broad and under-researched universe.
A key pillar of Brown Advisory US Smaller Companies' (BASC) investment strategy is providing attractive risk-adjusted returns over the long-term and it’s notable that many of the top ten holdings were purchased when Chris first took over running the trust in early 2021. BASC typically holds around 60-80 companies with a median market cap of around $7 billion which allows effective monitoring without the potential ‘de-worsification’ of a 120-plus stock portfolio.
While recent returns have lagged the benchmark over the shorter-term, with a 6.4% rise in NAV in the three years ending 31/03/2024 compared to an 8.9% increase in the sterling-adjusted Russell 2000 Total Return Index, the team has a strong record of long-term outperformance in its open-ended US smaller companies strategy.
Sector allocation has been the main detractor to performance over the last three years, and in particular, an underweight position to the oil sector. However, stock selection in the higher-growth sectors of healthcare and information technology has been a strong contributor to returns, including Biohaven Pharmaceuticals, EVO Payments and Mimecast Limited.
It should be noted that Chris is a bottom-up stock-picker meaning that sector allocations are a function of the quality growth characteristics that he looks for. The trust’s focus on companies offering durable growth, good governance and a strong ‘go-to-market’ position has resulted in BASC missing out on some of the more momentum-driven and speculative stocks which have driven the small-cap sector in the last financial year. However, the trust’s risk-controlled approach, together with a focus on quality factors, should lead to outperformance over the longer-term.
Looking forward, BASC should be well-placed to capitalise on a more supportive macroeconomic backdrop and a return to company fundamentals over the coming year.
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