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 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.

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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