Brown Advisory US Smaller Companies (BASC)

21/09/2023

Results analysis from Kepler Trust Intelligence

In the twelve months to 30 June 2023, Brown Advisory US Smaller Companies' (BASC) NAV increased 9.8%, outperforming the 7.5% rise in its benchmark, the Russell 2000 Total Return Index. BASC's share price rose by 10.4% over the same period, marking a slight narrowing of the discount from 15.3% to 14.8%. Post-period end, BASC's discount has widened to c. 16%. Brown Advisory took over management of the portfolio on 31 March 2021, and in the period from then until 30 June 2023 the NAV fell 1.6% compared to 4.9% for the benchmark index.

The relatively short period since Brown Advisory's appointment has been a pretty extraordinary one in markets, with rising inflation bringing an end to the long period of zero interest rates, with a profound effect on investor sentiment and a much greater focus on fixed interest over equities, all of which can be considered headwinds for smaller companies, which are generally considered more risky than large caps.

Against that backdrop, Chris and the team have for some time been pointing out that there is a widening valuation gap between small caps and large caps in the US. The team further points out though that even these low valuations are subject to distortion from many non-profitable companies, and further adjusting for this means that an active fund manager such as Brown Advisory has many opportunities to invest at attractive valuations.

BASC trades at a c. 16% discount, which is wider than its own recent average. Many other smaller companies trusts focused on Europe and the UK are also trading at double-digit discounts, which helps confirm that there is a general aversion among investors to smaller companies. Although it's unlikely to be a straightforward progression from here, we think waning inflation and interest rates could lead to outperformance by US smaller companies generally and BASC specifically.

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