Brown Advisory US Smaller Companies (BASC)
26/09/2024
Results analysis from Kepler Trust
Intelligence
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%.
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.
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
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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.
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.
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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