A 10.6% discount to NAV (net asset value) is an exciting opportunity to buy Brown Advisory US Smaller Companies (BASC), with Chris Berrier of new manager Brown Advisory wasting no time in enacting wholesale changes.

Formerly Jupiter US Smaller Companies, the trust’s name was changed in May 2021 after Brown Advisory took over the mandate on 1 April.

Berrier’s investment approach is tried-and-tested and there’s no reason why a pick up in performance shouldn’t see Brown Advisory US Smaller Companies trading at a premium alongside JPMorgan US Smaller Companies (JUSC), its sole peer in the AIC (Association of Investment Companies) North American Smaller Companies sector.

EXCITING ENTRY POINT

Morningstar reveals the trust has generated 10-year annualised share price and NAV total returns of 11.5% and 13% respectively, underperforming the Russell 2000 Total Return USD index’s 14.7% haul over the same period.

Yet this reflects poor performance under the value strategy pursued by the previous manager which new lead manager Berrier, who heads up the Brown Advisory US Small Cap Growth team, is seeking to reverse.

The change comes at an intriguing time for US small caps, with vaccines being rolled out at pace and giving America’s domestic economy a shot in the arm.

New president Joe Biden’s enormous stimulus package should boost economic activity further, in particular for domestically-focused US small caps.

This provides a favourable backdrop for Berrier, who has run a very successful quality growth strategy in the open-ended space since 2006 which has outperformed both the small cap Russell 2000 index and the Russell 2000 Growth index.

In fact, investment trust researcher Kepler points out the performance of Berrier’s strategy over the past five years has been particularly strong, and it has continued its longer-term trend of generating above-market returns with below-market levels of risk.

‘3G’ QUALITIES

Berrier’s proven process sees him hunting for opportunities within an ‘advantaged universe’ of companies with pricing inefficiencies he can exploit; analyst coverage becomes thinner the further down the market cap spectrum you go.

As he explained in a recent presentation: ‘The US has a large and deep market of small caps. It is a highly innovative economy, things are constantly changing and that provides opportunities for us to pick off interesting investments, hopefully before they become broadly recognised.’

Berrier has a great number of companies he can choose from in this highly diversified space, many of them relatively immature, whether financially or operationally or in terms of management or market position, and with long growth runways ahead of them.

The rigorous stock-picker aims to find firms that can demonstrate consistent growth ahead of the market over the long run, usually by opening up a new market, dominating a niche, or by having a differentiated business model or product.

He focuses on companies that possess what he describes as ‘3G’ qualities: durable growth, sound governance and scalable go-to-market strategies. Unsurprisingly, such high-quality assets pop up on the radars of potential bidders before too long, and Berrier’s small cap strategy routinely benefits from premium-priced takeovers.

One example is Nuance Communications, the AI specialist best known for its deep learning voice transcription service popular in the healthcare sector, which was initiated in the trust when Berrier took over in April and was subsequently acquired by tech titan Microsoft for a bumper $19.7 billion.

Admittedly, smaller companies tend to be riskier than larger companies, but Berrier’s portfolios are diversified across sectors, business models and economic sensitivities in order to mitigate risk, as demonstrated by the trust’s top ten holdings. This eclectic group includes the likes of Workiva, a SaaS platform expanding its capabilities in the financial management space, mobile games developer Zynga, payment processing services play Evo Payments and solid waste-to-recycling services company Waste Connections.

‘We typically try to offset the higher growth names in the portfolio, earlier stage like a Workiva, with things like a Waste Connections or a Charles River Laboratories, that might have a little bit more ballast and history to them,’ said Berrier recently.

It is also worth noting that as part of the new management contract, the board negotiated a fee cut, with the management fee falling by five basis points to and a tiered system introduced which will see it fall further as and when the trust’s net assets grow.

The overall ongoing charge is 0.97% according to the AIC which compares with 1.06% for JPMorgan US Smaller Companies.

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