Investment trusts with good performance records often trade close to or at a premium to their net asset value (NAV). When one of these moves to a discount, even though there is nothing fundamentally wrong with the trust, it can provide a good entry point.
Good long-term returns
Diversified exposure
Discount to NAV
Dividend growth
Short-term underperformance
A case in question appears to be BMO Global Smaller Companies (BGSC). Over the past few years, the trust has often traded at a slight premium to or close to NAV, but this year it is at a discount. This could be because of profit-taking on smaller companies funds, according to Iain Scouller, managing director, investment funds research at broker Stifel.
He adds: “BMO Global Smaller Companies, which has a good long-term track record, is at a 4.1 per cent discount, which is close to the widest discount for some years and appears reasonable value. Over the past six months, the range has been a 5 per cent discount to a 4 per cent premium. With around 70 per cent [of its assets] in small companies outside the UK, it offers geographic and currency diversification. This trust is a ‘one-stop shop’ for exposure to small/mid-cap growth companies, with investments in more than 20 markets. [Manager] Peter Ewins and his team have a consistently strong track record. The trust has delivered strong positive returns over the past 10 years and while we do not expect such strong returns going forward, the trust offers something different with its global approach."
Charles Cade, director of research at Numis Securities, says: “Recent NAV performance has been respectable, but the fund has underperformed large-cap global equity funds over the past 12 months and this could be a factor in weaker demand."
If this sentiment changes, the discount could narrow. The trust’s board has indicated that it aims to keep the discount at no wider than 5 per cent in normal market conditions and has recently bought back shares, which can help to bring in the discount.
Although its short-term returns do not look good, it has made good returns over the long term, beating its hybrid benchmark, 30 per cent Numis UK Smaller Companies (ex investment companies) Index/70 per cent MSCI All Country World ex UK Small Cap Index, over five years to the end of March. And its NAV returns have beaten the MSCI World Small Cap index in seven out of the past 10 calendar years, according to Morningstar.
Although it is not focused on income, the trust has increased its dividend every year for 48 years, which growth investors could reinvest, further boosting their returns. In its last financial year, it paid out 14.4p, up 17.6 per cent on the previous year.
BMO Global Smaller Companies invests directly in smaller companies in the US, UK and Europe, and smaller companies funds focused on Asia and emerging markets. When looking for direct investments in North America, the UK and Europe, its investment team focuses on meeting individual companies and assessing the quality of their managements, position in targeted markets and strategy for growth. They aim to invest in high-quality companies at attractive prices with the potential for strong returns.
The trust can, at times, underperform indices covering the areas it invests in, such as MSCI World Small Cap index. There is also no guarantee that the discount to NAV will come back in. And smaller companies are less mature and more focused than larger companies, meaning their share prices can be more volatile. They are also not as diversified and can be mroe dependent on a limited number of key personnel, increasing their risks.
But BMO Global Smaller Companies’ managers look to reduce smaller company risks by conducting detailed analysis on them and investing in a large number of stocks in various industry sectors and geographic areas.
And, despite periods of underperformance, over the long term – the timescale over which you should invest in high-risk assets such as smaller companies – the trust has delivered good returns.
So BMO Global Smaller Companies still looks like a good way to access growth over the long term at a discount. Buy. LW
BMO Global Smaller Companies
| PRICE | 1,342p | GEARING | 104% |
| AIC SECTOR | Global* | NAV | 1399.6p |
| FUND TYPE | Investment trust* | PRICE DISCOUNT TO NAV | 4.10% |
| MARKET CAP | £810m | YIELD | 1.10% |
| No OF HOLDINGS | 176** | ONGOING CHARGE | 0.83%*** |
| SET UP DATE | 15/02/1889* | MORE DETAILS | www.bmoinvestments.co.uk |
Source: Winterflood as at 30 April 2019, *AIC, **Morningstar, ***BMO
Performance
| Fund/benchmark | 1 year total return (%) | 3 year cumulative total return (%) | 5 year cumulative total return (%) |
| BMO Global Smaller Companies NAV | 4 | 46 | 76 |
| BMO Global Smaller Companies share price | -1 | 38 | 66 |
| MSCI World Small Companies index | 7 | 54 | 84 |
| Global smaller company investment trust average NAV | 9 | 61 | 104 |
| Global smaller company investment trust average share price | 8 | 57 | 104 |
Source: Winterflood as at 30 April 2019
Top 10 holdings (%)
| Eastspring Investments Japan Smaller Companies | 4.9 | |
| Aberdeen Standard SICAV I Japanese Smaller Companies | 4.7 | |
| Pinebridge Asia ex Japan Small Cap Equity | 3.7 | |
| Scottish Oriental Smaller Companies Trust | 3 | |
| Utilico Emerging Markets | 2.3 | |
| Alleghany | 1.3 | |
| STERIS | 1.2 | |
| HSBC GIF Asia ex Japan Equity Smaller Companies | 1.2 | |
| Martin Marietta Materials | 1 | |
| WEX | 1 |
Source: BMO as at 29 March 2019
Geographic breakdown (%)
| North America | 41 |
| UK | 25.7 |
| Europe ex UK | 11.7 |
| Other | 11.3 |
| Japan | 9.6 |
| Cash/fixed interest | 0.7 |
Source: BMO as at 29 March 2019
