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F&C Global Smaller ahead of benchmark

F&C Global Smaller Companies‘ interims covering the six months ended 31 October 2015 show the fund delivering a -1.5% return on net assets and a -0.8% return to shareholders. The benchmark is 70% MSCI World ex UK Small Cap Index and 30% Numis UK Smaller Companies (excluding investment companies) Index. This showed a -4.0% total return for the period. The interim dividend has been increased by 9.4% to 2.9p.

The portfolio’s outperformance was most marked in the US and UK – they beat relevant benchmark indices by 3.6% and 3.3% respectively. In Japan they underperformed by 6.2%.

The manager’s report gives s detailed look at the drivers of these performances.

In the UK portfolio, helped by the general economic environment, a number of consumer based stocks led the way. JD Sports Fashion’s core sports business is still taking market share in the UK, and the company is now moving to open stores in Continental Europe. Vertu Motors once again benefited from the strong UK car market and the management team’s skill in enhancing returns from acquired dealerships. Topps Tiles shares rose as sales benefited from more spending on home improvements.

After more than doubling in the second half of the previous financial year, the share price of tonics and mixers supplier Fevertree Drinks surged again. The company upgraded profits guidance with first half sales up by 62%. Shares in Rank, rose by almost 50%. A new management team has moved to augment the online side of the bingo and casino business, taking advantage of the company’s strong cash-flow characteristics. Elsewhere, online logistics services company Clipper Logistics was in favour, as it won a number of new contracts, most notably to serve John Lewis’s “Click and Collect” service.

The other positive feature of the period for the UK portfolio was a high level of takeover activity following on from a busy period in the previous year. Anite, Innovation Group and Phoenix IT in the software and services sector, together with business process outsourcer Xchanging, media services company Chime Communications and electronics company HellermannTyton, all fell prey to bids.

Of the weaker performers in the UK, companies exposed to the oil price again stood out, with Hunting, James Fisher and Pressure Technologies all forced to downgrade guidance. Faroe Petroleum dropped after announcing disappointing exploration results in the North Sea. Other companies to flag poor results included collectables business Stanley Gibbons, equipment supplier Speedy Hire and specialist care business Cambian.

The US portfolio performed well relative to the local market. The global insurance sector has seen a bout of consolidation in response to weaker insurance rates, and one of the largest holdings, HCC Insurance, received an attractive offer from a larger Japanese based peer. Other sector holdings, notably ProAssurance, also posted strong share price performance. In addition within financials, bank shares performed well as the market looked ahead to the potential for rising interest rates to lift margins. They increased our weighting to regional banks by buying two new holdings, and Sterling Bancorp performed particularly well as its earnings benefited from a combination of solid loan growth and cost-cutting.

A number of services businesses did well over the period, processing servicing business Total System Services was a positive contributor as it added Bank of America as a new customer, while a new holding in CDW Corp paid off as the company’s IT distribution business serving the US mid-market performed better than expected.

Long standing holding Atlantic Tele-Network rose as the market applauded good progress made by the company in deploying surplus capital. They decided to sell the holding in retailer Conn’s after a run-up in the company’s shares with results showing signs of improvement, a decision subsequently vindicated by weaker trading news later in the period.

Relative performance in the US was also helped by an underweight stance towards energy stocks, with only one oil producer Carrizo Oil and Gas, being held in the period. Genesee & Wyoming the railroad operator did however, suffer from lower oil sector related activity, while Summit Materials shares fell on concern about the oil-dependent Texas economy. Payment processor WEX directly exposed to fuel prices was also hit, serving to illustrate how the impact of the collapse in oil prices resonates across more than just the oil producers or service stocks. Other stocks which performed poorly in the US were HMS Holdings, which lost a contract in New Jersey, Pernix Therapeutics, where a product launch was delayed, and America’s Car-Mart, where credit performance deteriorated.

They were ahead of the small cap benchmark in Europe, with the largest positive contribution coming from Gerresheimer. This company sold a capital intensive glass tube manufacturing business and reinvested in a high quality US packaging business, moves which were well received by the market. Economic recovery in Ireland lifted the results of ferry operator Irish Continental Group, and the company acquired some container vessels at an attractive price.

Christian Hansen, the ingredients business, again delivered good results with margins better than expected. Structured financial products company Leonteq announced new partnerships which should deliver further good growth in the future, and the company is now looking to exploit its technological lead by way of licensing deals. Online betting company Betsson is operating in a consolidating market-place, and the company completed a well-received deal of its own in the period in Georgia. Other companies to produce pleasing results included sports equipment and clothing company Amer Sports and recycling/sorting machine supplier Tomra.

A number of the weaker European performers were found in the financial sectors. EFG International in private banking, disappointed with its cost/income ratio and weak new business figures in its first half. Shares in Sparebank were hit by rising loss provisioning as the oil price started to impact across the Norwegian economy, while in asset management Italian based company Azimut suffered as the country’s regulators moved to investigate performance fee structures across the industry. Shares in Bolsas Y Mercados, the Spanish stock market operator, pulled back as volumes fell at a time of regulatory change.

Some of the more cyclical industrial stocks held on the portfolio, such as semi-conductor equipment supplier ASM International, underperformed as peers signalled a slowdown. Automotive component suppliers SHW and Elringklinger were hit in the main by stock specific issues and we sold the holdings. Origin Enterprises, the agronomy and agricultural supplies business flagged a squeeze on its profits as a result of seasonal issues and pressure on farm incomes.

After an excellent performance in the previous year, Japanese performance was worse than the MSCI Japan Small Cap Index. Aberdeen’s Japanese small cap fund was a weak performer in the six months, with some of the fund’s holdings suffering from their exposure to emerging markets, and weak stock selection in consumer sectors. They switched the holding in M&G’s Japanese smaller companies fund for a position in the Eastspring Japanese smaller companies fund. Eastspring’s fund managers had been managing M&G’s fund but this arrangement ceased during the period, and they wished to retain exposure to the same core team who have done well in recent years.

On the Rest of World side, they are investing in funds that invest in smaller company stocks in Asian, Latin American, Middle Eastern and African markets. Over this period, these markets were generally on the back-foot. The Chinese stock market set the tone for wider Asia, with a collapse in early summer prompting some naive policy moves from the authorities. A large proportion of Chinese small cap shares were suspended for a number of days during the worst of the turmoil. While underlying fund holdings collectively have an underweight exposure to China, other local markets were not immune, and with regional currencies falling versus sterling, the overall return was worse than in all other parts of the fund. Having said this, they benefited from discount narrowing on our holdings in the Scottish Oriental Smaller Companies and Utilico Emerging Markets trusts, and so in overall terms our Rest of World portfolio held up better than both the Asian and Latin American small cap indices.

FCS : F&C Global Smaller ahead of benchmark

 

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