F&C Global Smaller Companies was one of the funds Advance UK used to have regular heated debates with (from the late 1990s until the mid 2000s). The problem as we at Advance saw it was that there was no institutional demand for a global smaller companies fund and as a result, the discount was often too wide. Today the situation is much improved, with the shares trading at a modest premium.
The fund is one of those great survivors from the early days of investment trusts, with the original company having been launched in 1889. It was quite a feat for it to keep going when its institutional shareholders decided they no longer needed to use the fund as a subcontract for investment in smaller companies.
The transformation of the share register has been remarkable. Even back in 2003 institutions held more than half of the shares, now though they are less than 10%. To get there F&C Global Smaller Companies has had to buy back about 60% of its capital. Even after buy-backs on this scale, the fund has a market capitalisation of £250 million.
The dominant shareholder now is the savings scheme, which holds over 60%. This might restrict liquidity but the drip-drip of money into the fund does tend to narrow the discount.
F&C Global Smaller Companies has no close competitor. Henderson Smaller and Henderson Strata both used to have international remits but the former went 100% UK in 1999 and the latter was reconstructed to form Henderson Opportunities in 2007. The AIC lumps North American Smaller Companies and Oryx into the global smaller companies sub-sector but these funds have quite eclectic portfolios and are not true comparators.
It has also helped that the fund’s long-term performance has been good. Over 10 years its net asset value (NAV) has almost tripled. That means it has outperformed the average UK Smaller Companies fund by about 1% per annum.
The best way to have been sure of beating the UK small cap funds over the past decade would have been to have a significant weighting to Asian smaller companies. The equivalent MSCI Index does not go back that far but the NAVs of Scottish Oriental and Aberdeen Asian Smaller have gone up five and sixfold over the same period. The F&C fund did not go down that route, however.
If you have to criticise F&C Global Smaller Companies, it would be for hugging the benchmark with its asset allocation. The benchmark, since 2010, is 70% MSCI All Country World ex UK and 30% Numis UK Smaller Companies (the old Hoare Govett Index). Prior to 2010 the weightings were 60:40. At the end of April 2012, the biggest geographic bet against the index was an underweight of 2.4% to North America.
The board and the manager say they are ‘conscious’ of the benchmark weightings but the asset allocation looks unadventurous to me and unsurprisingly, it tends to have far less influence on the performance of the portfolio than stock selection.
The portfolio is organised along regional lines. Peter Ewins (pictured) oversees the portfolio and is responsible for investments in UK, Japan, Asia and Emerging Markets. Robert Siddles (manager of F&C US Smaller Companies) covers North America and Sam Cosh (European Assets and the open-ended F&C European small cap fund) covers Europe.
You might be forgiven for thinking that this looks like the set-up for Alliance Trust before the recent changes and remember that I criticised this. However, F&C Global Smallers is outsourcing the fund management of some regions and sectors with holdings in investment trusts, open-ended funds and exchange traded funds (ETFs) to cover Asia, Australia, Brazil, Japan and Russia.
The effect of running funds alongside regional portfolios is to increase portfolio diversification. There are around 200 holdings and the largest, Conns (a Texan home electrical retailer), is just 1.4% of the portfolio. By sticking to what it is good at and outsourcing the rest it has managed to generate the added value from stock selection to produce benchmark beating returns.
The charges are very competitive. The annual fee is just 0.4% on the assets managed internally and, to minimise the effect of using third party funds, just 0.25% on the externally managed assets. They can earn a performance fee equivalent to 10% of outperformance of the benchmark with the overall fee capped at 1%. The only real negative is the debenture – just £10 million nominal but with an interest rate of 11.5% fixed until 2014.
I can understand why this fund might not suit everyone but as a way of having some diversified exposure to small caps, I think it is ideal. Just remember the fund and the benchmark are both heavily weighted towards the US (around 40% of the portfolio). If you want to vary the asset allocation, you might have to add another couple of funds to the mix.
James Carthew is a director of Sapient Research