Is it time to bag an investment trust bargain?
2023 has been tough for investment trusts. In the first half of the year, the average investment...
Peter Ewins, manager of The Global Smaller Companies Trust, has worked with the fund for 25 years and has experienced many ups and downs. He looks at the current market conditions, as turbulent as they are, and discusses the effects on the global environment for smaller companies. He comments on the Trust’s geographic and sector weightings, discusses the discount widening and whether it’s got further to go, and wraps up with some positive news on several additions to the portfolio.
Please Note: Below is a transcript of the video, modified for your reading pleasure. Please check the corresponding video before quoting in print, as it may contain small errors.
Hello, I’m Chris Salih, investment research analyst at FundCalibre, and today I’m delighted to be joined by Peter Ewins, manager of The Global Smaller Companies Trust. Thanks for joining us. How are you?
[00:14] I’m well, thanks. Yeah, thanks for having me on this.
It’s no problem at all. Let’s start with the state [of the] financial markets, the joy that that is. Obviously, we’ve got high inflation, rising interest rates and the threat of recession… not great, obviously. Maybe let’s start with just how that affects smaller companies and how they’re performing at the moment, and maybe how you expect them to behave, if and when the picture starts to brighten?
[00:39] Yes, well I think, obviously you’ve mentioned a few issues. I mean, there’s a lot going on in the markets as everyone on the call I’m sure knows, and not all of it positive. So yes, smaller companies are having a difficult 2022.
I think we tend to see this when, with smaller companies’ relative performance against the larger stocks, times of economic uncertainty or weakness [are] projected ahead, we see them underperforming, and we’ve seen that in a number of markets this year. Not all of them though, actually.
But, you know, ultimately people have been seeking a little bit more defensive investments, [for] obvious reasons really, as the economic outlook has deteriorated. So, I don’t think it’s any surprise that some smaller companies [are] having a difficult year, but you know, that’s, it’s not unique to smaller companies. There are, you know, a lot of companies facing challenges from this, as you say, the higher cost pressures – inflation – and we’re having to look at the portfolio obviously very closely, stock by stock really, to see how companies are doing.
I think to your point, you know, how will things do if things brighten up? I think, you know, what we probably need to see for smaller companies is a perception that interest rates perhaps are peaking in North America and perhaps, you know, in Europe as well, in the UK. And if we get a feeling that interest rates are peaking, and if we get a feeling, a sense, that the downturn is going to be shallow, then I think smaller companies could rebound quite quickly, but I think we do need to see, you know, some better signs economically.
You mentioned that sort of everything’s not collapsed at the same rate. It’s not a case of every global smaller company’s sort of been maligned, but some have performed better than others. Obviously, the UK and Europe is sort of among the worst performing, [the] US and Japan [are proving] pretty resilient. Could you maybe just explain why that is?
[02:21] So obviously,we all know about the cost-of-living crisis, the rising energy prices, and that’s having more of an effect on the local consumer environment in Europe and the UK. And it’s having more, compared to North America which is obviously in a much better place in terms of self-sufficiency with energy. So, it’s no great surprise, I don’t think, that Europe and the UK are more in the cross hairs of the weakness at the moment.
But yes, North America, the economy was fundamentally pretty strong going into the current year. We’ve seen interest rates rising sharply there, so that market’s not been immune either. But ultimately, maybe the fundamental strength there of the economy is, you know, stronger going into this period of weakness.
And Japan… the Japanese economy [is] performing okay, actually not doing too badly. We’ve got no real massive inflationary pressures there. In fact, we, you know, it’s almost welcome [that] there’s a bit of inflation coming into that economy. Smaller company shares have done a little bit better there in the current year. And I think, to a degree, the whole market there has been helped by the weakness of the Yen. So, companies exporting from Japan [are] benefiting from that. So, you know, there’s a lot to think about, but yes, you’re right, the smaller company relative performance has probably been weakest in UK and Europe and better elsewhere.
And I mean, you’ve touched on it there, but let’s go a bit deeper in terms of sort of turning to the portfolio in general. Obviously the top 10 is sort of dominated by positions in the likes of Japan, Asia, and emerging markets. Can you maybe explain why that is and tell us why you’re overweight and sort of, are there specific countries in there, that you’re particularly keen on?
[04:20] Yes, so the top [of the] portfolio, just to explain very quickly, we do use collective funds, third-party managed funds, for Japanese exposure and for exposure to emerging markets, Asian and Latin American companies. So, you will see that we hold a really reasonably small number of these, these funds – actually less than 10 – and they do, but we do tend to have large units in them. So, they do tend to find themselves near the top of the list, as you say.
It’s not so much that we’re overweight those parts of the world. We are slightly overweight Japan at the moment, you know, partly due to the reasons that I’ve just sort of started to explain, the more resilient nature [of] the Japanese economic performance at the moment is supportive of that view. Emerging markets are actually slightly underweight actually, relative to the rest of the world segment of our portfolio, slightly underweight relative to our benchmark.
So, and ultimately they look like they’re very big holdings, but actually relative to our benchmark, we’re not taking a particularly big view in that part of the world. But yes, as I say, you know, these collective holdings, they find themselves near the top of the list because we do have a small number of them to get our exposure of about 20% towards Japan and the rest of the world.
Okay. And, and obviously the trust is currently trading at sort of quite a large discount to NAV [Net Asset Value], are you surprised by that in this sort of scenario and environment? And the optimist in me is thinking, do you think this is now an opportunity rather than something to worry about?
[06:00] <Laugh> Yes, I mean, so I’ve been involved with this fund for a quarter of a century, and I’ve seen the discount come and go. I mean, I think at times of market uncertainty, weakness, market weakness, you do tend to see investment trusts’ discounts widen.
I think we’ve been surprised at how much we’ve widened out on this fund. But we’ve seen that widening across a lot of smaller company trusts in the last period. You know, ultimately there’s been some net selling of this fund and also other trusts in the market, and maybe not so many people looking to buy the shares. So, there is pressure on ratings. This trust does operate a discount control policy to try and keep the discount under control, and therefore the board do authorise share buybacks. And we regularly have been buying in shares, but that hasn’t stopped the discount widening in this sort of very, you know, gloomy sort of environment.
[06:52] So I suppose all I would say, I’m not going to predict about where it’s going to move in the short-term, but I think, you know, taking a long-term view, you don’t tend to see discounts staying this wide for a very protracted period of time. You know, across the sector, I think there are opportunities across the investment trust sector to take advantage of that, because if you’re buying at a wide discount, then in a few years’ time and a discount does normalise, you get the upside from that normalisation in your returns. But in the short term, could the discounts go even wider? Of course they could, if there’s some further very bad news on the macro economy or some, you know, some bad news on the war, inflation, etc.
You’re often viewed – small caps – as the place to be on the way out of recession. So, there is a bit of optimism, hope, that maybe when things turn, they’ll turn quickly for small caps in general…
[07:42] And yes, yes, I think that’s right. Yes. I, sorry, I’ll let you carry on.
I just wanted to finish… obviously the small cap sector [is] sort of the sweetspot almost for active managers. And I just wanted to finish with a couple of opportunities [that] you may be seeing in the market or in your trust at the moment, that you’re finding interesting…just a couple of stock examples please?
[08:03] Yeah, and I’ll mention a few if I may. I mean, so, you know, we are generally finding more valuation opportunities in this market because obviously, share prices are much lower than they were a few months ago. And this is providing opportunity for active managers.
In Europe, we’ve bought a holding in a company called Glanbia, that’s the Performance Nutrition business and specialty ingredients business that we think is, you know, is well managed and is serving the health and wellness, sort of trend with a very strong brand called Optimum Nutrition in the marketplace there. And the company’s performing very well in 2022, has managed its costs very well and looks well set for the future. That one we’ve added recently.
In the UK, we’e doing well with a holding called Begbies Traynor, which is actually an insolvency-related business, so the weak economy sometimes brings companies good news. So, this company has for many years actually, sort of, if you like, suffered from the lack of insolvencies. Obviously, none of us want to see companies go bust, but this company actually does benefit from companies going bust because it serves that insolvency market, so that company’s done well.
I mean, more generally, Chris, we’ve been looking for areas, more defensive investment areas, particularly areas like defense actually, where the war situation is actually enhancing the outlook for defense-related companies. So, a company called Curtiss Wright in North America. We’ve [also] acquired recently Qinetiq in the UK, we’ve added over the course of this year.
[09:34] And then maybe, finally another area that we have put some more money into in the course of 2022, is energy services related. A company today actually has had [a] positive announcement called Ashtead Technology. That’s the company we bought into earlier in the year. They provide the offshore industry with maintenance services. They also provide the renewables industry with a whole range of services. So, they’re benefiting from the rollout of new renewables investment in the UK, off [the] North Sea. So, that company’s got to, you know, just upgraded its forecast today and is trading very well.
And then we’ve also added to other holdings in energy-related businesses in North America. A company called Bristow Group [Inc], which is a helicopter services business, serving the offshore and energy markets in particular, and Kirby [Company] as well in North America.
So, you know, there’s a whole load of sort of companies that are actually doing quite well in this market, you know, in niches. But you know, there are also other companies that are going to be facing tough times in the….
Just quickly then, has turnover been higher than normal. And is that something, if it has been, is that something you expected?
[10:40] It hasn’t actually been that high, I don’t think, Chris, I mean, you know, obviously we are monitoring the portfolio very closely, individual stocks. So, you know, obviously there’s always a temptation to do transactions, but ultimately, you know, I think we’ve got to take, we’ve got to be careful about the level of activity at all points in time.
And I think the environment is changing so much, you know, and the interest rate environment that we’re looking at today is very different to what we expected, a period of time ago. So, I think we have to be careful what we do, but we do have to take account of this evolving situation.
But I think I would just repeat, you know, there are more opportunities in the market, but obviously if you’re buying something, you’ve got to realise [sell] something else to fund it. So, and sometimes that’s not so easy at times like this, when the markets are weak.
Peter, as always, thank you very much for your time today.
[11:34] Oh, it’s a pleasure. Thanks Chris.
And if you’d like to learn more about The Global Smaller Companies Trust, please visit fundcalibre.com.
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