Brown Advisory US Smaller Companies (BASC)

30/09/2022

Results analysis from Kepler Trust Intelligence

Brown Advisory US Smaller Companies (BASC) has released its financial results for the year ending 30/06/2022. The trust saw a -14.0% drop in its net asset value (NAV) on a total return basis and a -23.1% decline in its share price, also on a total return basis. The trust's benchmark, the Russell 2000, fell by -15.2% over the same period, meaning BASC outperformed by 1.2% on a NAV basis.

BASC's returns for the year were achieved in the context of an extremely tough macroeconomic environment for small caps and growth strategies. Rising inflation and interest rate hikes have put downward pressure on equity markets and higher value growth stocks saw steeper price drops as a result. BASC's relative outperformance was largely the result of the managers' stock selection, as they avoided areas of the market that had been more susceptible to speculation during the pandemic.

Despite the difficult macroeconomic environment, the managers have been able to take advantage of lower prices, adding 14 new holdings to the BASC portfolio in the year under review, mainly in the final quarter. Their cash holdings and unused gearing facilities should mean they are able to take advantage of other opportunities if they arise.

Chairman of the board Stephen White said: "Equity markets are likely to remain unsettled for the time being, and US smaller companies are no exception. However, once the fundamentals do start to improve, we see the US again at the forefront of any recovery. Given their greater exposure to the domestic market US smaller companies should benefit accordingly, thus justifying a dedicated allocation in any portfolio and a commitment to our Portfolio Manager's proven approach in identifying attractive opportunities within the space."

Kepler View

Brown Advisory US Smaller Companies (BASC) provides investors with access to a portfolio of high-quality US growth companies. Chris Berrier has managed the portfolio since April 2021, but has managed US small cap strategies for Brown Advisory for over 15 years, delivering strong outperformance for investors in that time. His approach for BASC is to look for companies that meet what he terms '3G' characteristics. Those are durable growth, sound governance, and scalable 'go-to-market' strategies, which can take a company from small cap to large cap status.

It is impossible to say when the volatility we've seen over the past year is going to abate. Nonetheless, looking to the long-term, there are reasons to be more optimistic about BASC's prospects. On a macro level, the US looks better able to recover from a prospective economic downturn. Energy independent and with a more dynamic economy, it looks less susceptible to the sorts of problems European states are facing today. And like other small cap markets, the companies in which BASC invests tend to derive more of their revenues from the domestic economy, meaning a US recovery is likely to have a meaningful impact on them. Chris' long-term track record of adding alpha in this market is another reason to be optimistic.

Market volatility has also provided opportunities for Chris to buy, with 14 additions to the portfolio made in the reporting period. These firms all fit within the manager's '3G' framework, but were available on more attractive valuations. We note that BASC is well-placed to take advantage of further opportunities, given that it has a relatively high level of cash at its disposal and has not used its gearing facilities.

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