GLOBAL SMALLER BUSINESS TRUST: How small businesses in Japan have been a good place for UK funds
Making big bucks by investing in a portfolio of smaller companies has proven difficult in recent years as economies falter – and both interest rates and inflation have soared.
The only consolation, as far as shareholders of one of the largest investment funds in the field are concerned, is that dividend income has continued to rise.
For the 53rd consecutive fiscal year, The Global Smaller Companies Trust has just raised its dividend and its manager Peter Ewins is confident that higher earnings will come in the future.
“Of course a global recession could topple the apple cart,” says Ewins. “But the rising income from our portfolio reflects the type of growth stocks we hold. Growing companies, with robust balance sheets and sufficient pricing power to fight inflation, are often well placed to pay dividends.’
In its latest financial year, which ended April 30, the £728 million trust saw income from its holdings rise by 28 per cent.
While a small portion of this income was tucked into the trust’s reserves (which are paid out in tougher times), shareholders still received a healthy 25 percent increase in dividends.
“It’s probably the most pleasing aspect of the trust’s performance over the past financial year,” Ewins says, as some holding companies, such as UK-listed Energean (a natural gas producer), are paying dividends for the first time.
Like all trusts that invest in smaller companies, the total returns numbers are less impressive. Last year, the trust posted a loss of 2 percent. In five years, it made a small profit of 4 percent. Of its peers, only Herald has a better performance record over these two time periods.
Ewins says the fortunes of smaller corporate funds are unlikely to improve until both interest rates and inflation begin to fall. “We need to see interest rates and inflation spike in the US,” he says, “before investor interest in smaller companies is reawakened.”
More than 40 percent of the trust’s portfolio is in US-listed smaller companies.
The trust is managed from London and currently has 190 direct holdings. It also has interests in eight mutual funds that provide the trust with exposure to smaller companies in Japan, Asia in general and emerging markets.
Ewins says Japanese smaller companies have been a bit of a sweet spot for confidence as the Japanese economy hasn’t been impacted by the kind of rate hikes in Europe, the United States and the UK. Two of the top five holdings are Japanese smaller companies run by investment houses Eastspring (based in Singapore) and PineBridge (owned by Asia-based Pacific Century Group).
Other major contributors to the positive return in recent months were UK confectionery wholesaler Kitwave and US building materials supplier Eagle Materials. Ewins says Kitwave is “not in a sexy industry,” but has benefited from a number of smart acquisitions. The share price has risen by more than 90 percent in the past year.
Eagle Materials, he says, has strong demand for its products — everything from cement to plaster — due to the U.S. government’s decision to improve infrastructure. The trust has also generated returns by acquiring holdings such as industrial consultants RPS Group and waste management group Biffa at attractive prices, crystallizing profits. The trust is part of US investment house Columbia Threadneedle, the annual fee is 0.75 percent, and the exchange ID code and market ticker are BKLXD97 and GSCT, respectively.