Ride out the US storm

F&C US Smaller Companies has beaten both its benchmark, the Russell 2000 index of US smaller companies, and its peers over one, three and five years in terms of both net asset value (NAV) appreciation and share price total return. Because sentiment on the sector is negative, the trust is also trading at a discount of more than 5 per cent - nearly double its average - making it an opportune time for investors to get in while it's cheap.

US growth prospects may indeed be uninspiring, but with this trust you are not buying US gross domestic product (GDP), but rather an actively managed portfolio of shares. The trust's manager, Robert Siddles, takes a conservative approach to stock selection, and targets companies that have a strong franchise, free cash flow and managers who hold a stake in the business.

Mr Siddles has managed the trust since 2001 and, despite turbulent times for the market, he has largely succeeded in beating the benchmark. The trust performed well during recent turbulent times, with NAV per share up 50.6 per cent against a rise in the benchmark of 30.1 per cent in the three years to 31 December 2010. Prior to taking over the management of the trust, he spent nine years at Gartmore Investment Management, the last five as head of US equities. He has also run US equities at Capel-Cure Myers Capital Management.

F&C US Smaller Companies aims for long-term capital growth via a diversified portfolio of smaller- and medium-sized companies with market capitalisations between $100m and $3bn. It focuses on absolute as well as relative performance - it aims to make more than zero, rather than just beating its benchmark.

Although the trust can take on debt, it does not hold any at present. With a market capitalisation of around £79m, the trust is double the size of its US smaller company peers, meaning its shares should be easier to buy and sell, a factor that can help prevent the discount from becoming too wide.

The investment trust's conservative approach to stock selection means it can underperform the index during rallies. That occurred in the second half of last year when sectors that F&C US Smaller Companies avoids, did well. However, the trust tends to protect very well against downside when the market is not doing so well.

The trust charges a performance fee of 5 per cent of any outperformance of NAV target performance, defined as a margin of 2 per cent over the Russell 2000 Index in sterling terms. Although this was not levied in the last performance period (the year to June 2010), given the trust's strong historic performance record you can expect this to be levied from time to time. However, the total expense ratio (TER) should remain relatively reasonable as the performance fee is capped at 0.7 per cent of gross assets - and does at least align the managers' interests with those of investors. Buy.

Source: Investors Chronicle & *F&C

Performance data as at 16 September 2011

TOP TEN HOLDINGS as at 31 August 2011

Sector BREAKDOWN