There is a lot to ponder as a portfolio manager today. Expansionary fiscal initiatives from the new Chancellor, Kwasi Kwarteng, have heightened worries about a further widening of the already huge UK current account deficit, Sterling has set a new all-time low against the US dollar and the International Monetary Fund, in a very unusual move, has advised the UK government that its November budget presents an early opportunity to “re-evaluate” the new tax measures.
As the ebb and flow of history swirls around us, financial markets have become more volatile, perhaps unsurprisingly given all that is going on. Clearly a weaker economic environment is creating challenges for an increasing number of companies. While things are evolving at a fast pace, for The Global Smaller Companies Trust we remain clear on our aim of taking a long-term view to identify and back high-quality smaller companies, listed on global stock-markets, offering strong growth potential in future years.
Our approach of having diversified exposure, across the range of sectors, reduces the risk of becoming over-exposed to shifting popular themes and areas where valuations have extended too far. Focusing on companies with resilient business models and sound balance sheets, that can endure challenging macroeconomic times, also takes on a more heightened consideration.
Patience usually pays off
In the smaller companies’ universe, notwithstanding today’s more difficult economic backdrop, there are plenty of younger businesses that genuinely have the potential to become significantly bigger businesses. When we invest in a company’s shares, we want to be confident about the fundamental investment case for that business, in particular, about the quality and depth of the management team behind it. Well managed, soundly financed and profitable companies tend, over time, to result in takeover approaches from either private equity operators or peers in the same business. Over the course of our 2021/22 financial year, ending in April 2022, no fewer than 17 of our holdings were subject to takeovers or merger approaches.
Sometimes the prices paid in takeovers offer a large upside versus the prevailing share price pre the bid. Three examples of this, over the last year, were US listed insurance and reinsurance company Alleghany Corporation, UK wealth management business Brewin Dolphin and Leeds based Clipper Logistics. All had been in our portfolio for a long time, in the case of Alleghany Corporation for more than 15 years. Clipper Logistics we bought at its initial public offering (IPO) in 2014. Its takeover price was more than 8 times its IPO price. With smaller companies, as with equity investment in general, it helps to sometimes be patient.
Keeping pace with changing times
In addition to a good track record, we want our holdings to move with the times and make the necessary investment to keep pace with a changing world. To this end, technological advances and options in interacting with customers is key to nearly all businesses today. How companies are taking account of environmental, social and governance issues in their businesses is also becoming more relevant to stakeholders and influencing the way the stock market values them. We look to work with the companies in which we invest and encourage them to progress on key initiatives, for example around climate change.
A global opportunity set
We seek to give investors genuine global exposure, investing in the best opportunities wherever they may be. Asset allocation in a geographic sense does evolve over time, taking account of different local conditions and opportunity sets, but the trust has always had a large exposure to North America and UK based companies. A shareholder friendly culture in North America and the breadth of opportunities in that market, lean towards this part of the portfolio tending to have the most exposure. The UK small cap scene is attractive to us due to the ease of company contact and the generally better standards of corporate governance in the UK market, compared to many international markets. A lot of our UK holdings are highly exposed to international markets so are not purely plays on the presently more difficult domestic economic environment.
With the cost-of-living crisis more acute in Europe and the UK than in North America, we have been looking to add exposure to the latter. We have taken the UK weighting lower and using the proceeds from some of the takeovers we had in this market, have re-deployed funds elsewhere. In relation to Asia and emerging markets, uncertainties around the Covid policy outlook in China have held back our enthusiasm for now but we do see scope for more exposure over time. Elsewhere, India appears to be doing well at attracting more investment from international business following a period of economic reform.
We use collective funds to access the best companies in Asia and broader emerging markets, and we are pleased to report that our holdings in both the Scottish Oriental Smaller Companies and the Utilico Emerging Markets trusts, are presently doing well for us.
