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F&C Global Smaller Companies boosted by takeovers

Top 100 Funds update: The investment trust has beaten its benchmark, helped by nine UK takeover bids.
July 1, 2015

F&C Global Smaller Companies (FCS) reports a 16.2 per cent net asset value (NAV) total return and 17.6 per cent share price total return in its last financial year to 30 April 2015. This compares with 14.8 per cent for its benchmark, the 70 per cent MSCI All Country World ex UK Small Cap Index and 30 per cent Numis UK Smaller Companies (excluding investment companies) Index.

The UK segment of the portfolio delivered 13.4 per cent against 6.2 per cent for Numis UK Smaller Companies (excluding investment companies) Index, helped by nine takeover bids. These included Salamander Energy, Pace (PIC) and Domino Printing Sciences.

Peter Ewins, manager of F&C Global Smaller Companies, says most of the holdings were taken over at a premium to the price at which the trust bought them, but Salamander was an exception because oil companies can't negotiate in the current environment. Since the year-end technology companies Anite (AIE) and Phoenix IT (PNX) have also received bids.

Turnover across the trust rose in its last financial year as it invested the proceeds from a convertible unsecured loan stock issue and share issues, took profits on holdings that had performed strongly, and reinvested in more new ideas than in its previous financial year. "When many stocks are at all-time highs, it is important to look for new opportunities and stocks where there is still potential for good management teams to drive better profitability," says Mr Ewins.

He says smaller companies are not cheap at the moment, so finding value is harder. But overreactions, for example to the situation in Greece, could cause markets to come down and provide opportunities.

The trust's managers have recently turned to the UK as Mr Ewins feels this market will perform better in relation to global markets in the year ahead, and also because they found it easier to identify new opportunities as there were a number of initial public offerings (IPOs) they found attractive.

"When new companies list on the market we are generally cautious as they often come at unattractive valuations and sometimes management teams are not ready to make the transition into the public arena," says Mr Ewins. "This year, however, we took part in eight IPOs, as we felt that each offered us exposure to an interesting new growth story at an attractive price. One of these, Fevertree Drinks (FEVR), more than doubled in less than six months after its launch." This company supplies drinks mixers to restaurants, bars and retailers globally.

 

 

The trust also invested in the listings of mortgage company OneSavings Bank (OSB), audio products supplier Focusrite (TUNE), infrastructure investor John Laing (JLG), fund administration business Sanne (SNN), transport company Clipper Logistics (CLG), bar operator Revolution Bars (RBG) and furniture retailer ScS (SCS).

Since the year-end it has also bought Sophos Group (SOPH) and will take part in specialist lender Orchard Funding's IPO.

The trust's managers run the portfolio predominantly on a stockpicking basis. However, exposure to different geographic markets is adjusted according to local valuations and the outlook for currencies, and a macro issue the trust's managers took into consideration in 2014 was the oil price fall.

Its managers rationalised oil holdings down to those with strong balance sheets as Mr Ewins is wary about the level of short-term earnings, and the trust is underweight oil relative to the benchmark, with this sector accounting for 1.9 per cent of assets at the end of April.

But they also introduced new positions in energy-related stocks that looked too cheap on a medium-term view. Mr Ewins thinks Faroe Petroleum (FPM) remains significantly undervalued given the potential for growth in its oil reserves, its strong balance sheet and solid existing production base. And in the US he added Carrizo Oil & Gas (CRZO:NSQ), which operates in an area where production economics are better, and it has a stronger financial position than many peers which may enable it to acquire distressed operators.

Mr Ewins increased exposure to Asia as he thought valuations for small-caps in the region were becoming relatively more attractive, and that there was scope for monetary easing.

The trust has benefited from increases in dividends paid by the companies it holds, particularly those in the UK, so proposes a full-year payment of 9.65p - 20.6 per cent higher than last year.

As a result of its outperformance the trust's manager, F&C, will get a performance fee of £983,000, resulting in an ongoing charge of 1.08 per cent. Transaction costs amount to 0.11 per cent.