F&C Global Smaller Companies has announced its interim results for the half-year ended 31 October 2016. During the period, the company has provided an NAV total return of 18.0% and a share price total return of 17.4%. The returns are modestly below that of the company’s benchmark index, which is calculated from the returns of the MSCI World ex UK Small Cap Index and the Numis UK Smaller Companies (excluding investment companies) Index in a 70%/30% proportion, which the company says was up by 18.8% on a total return basis.
In terms of portfolio performance, the portfolio manager, Peter Erwin, says that the UK, US and European portfolios all ended up behind the local small cap indices but, in all places they were comfortably in positive territory, albeit the bulk of the four overseas portfolio rises were as a consequence of the fall in sterling. The best returns came from the company’s Japanese portfolio which beat the MSCI Japan Small Cap Index, while the Asian centric Rest of World portfolio produced a return that surpassed the MSCI Asia ex Japan Small Cap Index, even if it did lag the returns from Latin American small caps.
Peter says that returns, while strong in the US, could have been better here if they had had a higher allocation to technology stocks, which were in favour. Stock selection within both technology and financials also undermined the company’s relative performance. In the former area Safeguard Scientific’s shares were weak as the company’s portfolio of healthcare and technology investments failed to progress as fast as expected, while travel software business Sabre Corp reported disappointing results. In the financials, Hallmark Financial Services lagged the market as insurance stocks fell out of favour. In the Real Estate sector, Peter says that the portfolio was were hit by a sudden slump in the shares of prison operator Geo Group when the Department of Justice announced that it was to gradually phase out the use of private prisons. Foodservices company Chefs’ Warehouse was weak as the company delivered poor results following a mis-handled acquisition. Golf and country club operator Clubcorp also fell, which Peter says was in part due to a move away from more highly leveraged stocks, a trend that he saw in other markets in the period.
However, Peter comments on a number of good US performers. Two stocks were taken over by larger peers. These were bank Cardinal Financial and luxury home builder WCI Communities and Peter says that there was also interest shown in two of the company’s other holdings, The Andersons and Microsemi, and both shares performed well. In the consumer sphere America’s Carmart rose 53.7% as competition in the market appears to be easing. Vail Resorts continued to perform well, helped by the positively received acquisition of Whistler in Canada.
Peter says that the company had other winners were from a range of areas. Payments processor Total System Services did well as the outlook for North American organic growth brightened, while data protection and information management software company Commvault Systems rose as its turnaround gained traction. Advisory and services company ICF International benefited from better execution in its commercial business segment. Shares in managed care company Wellcare rose as forecasts moved higher on the back of better margins, while communications services business Zayo was up as new installations rose.
The UK small cap market initially fell heavily post Brexit, but there was a quick recovery as overseas earners profit expectations were upgraded. From a sector perspective, Peter says that the relative performance was held back by being underweight in mining stocks but that they did add to this exposure during the period, but not before commodity price rises and weak sterling had driven the sector sharply higher.
Peter says that there were several individual stocks which struggled, most notably Laird. This electronics components company reported disappointing sales and margins, as business with its largest customer failed to meet projected levels. Peter says that the situation was compounded by management change and higher than ideal financial leverage. The Brexit news led to weakness in retail shares, with Topps Tiles among the largest fallers. Vertu Motors also dropped as signs emerged that new car sales were plateauing. Real estate stocks were mainly lower, particularly in the case with companies exposed to London given uncertainty about the outlook for tenant demand in the office market and fears that residential property prices would fall. The holdings in development companies U&I Group and St Modwen Properties both fell back but these were added to on the weakness. Separately, sports agency business TLA Worldwide dropped 31.5% after a takeover approach was not consummated.
Peter says that they did well in the healthcare sector, where several animal related businesses including Dechra Pharmaceuticals, Genus and Eco Animal Health produced encouraging results. Speciality pharmaceuticals and clinical services business Clinigen, was another positive contributor in the sector. Peter says that the outstanding performance of premium tonics supplier Fevertree Drinks continued, with the shares up by 57.8%. The company announced a further upgrade to sales and profit expectations and its UK sales now look set to approximately double in 2016 on the back of enhanced distribution. The company participated in several new IPOs in the period, with chocolate retailer Hotel Chocolat and media business Ascential, the pick of these in terms of their early performance.
Elsewhere on the UK portfolio the company’s holding in John Laing Group, which originates, invests in and manages infrastructure projects around the world, was another good performer. The company confirmed progress on its new project pipeline and on disposals of completed project investments. The largest overall positive contributor in the period in the UK was Craneware. Scottish based, this company serves the US hospitals marketplace, supplying software which saves customers money and enables compliance with an ever-stricter cost reimbursement regime. Peter says that the shares rose by 55% as profits beat expectations, and visibility is good, stemming from a high level of recurring revenues.
The company had a tough half year in Europe. Peter says that one of the main reasons for this was our exposure to a number of Irish listed stocks, which suffered in the aftermath of Brexit given the strong trading links between the two countries. Agronomy services company Origin Enterprises, was particularly weak as poor weather conditions in the Spring placed pressure on its key selling season for crop protection advice and products. Performance nutrition and specialist dairy ingredients supplier Glanbia was also down although the company produced solid results and held guidance for its full year.
Elsewhere in Spain, Peter says that two of the company’s more cyclical holdings Mediaset and Atresmedia fell out of favour as advertising growth slowed. However, they were pleased that these companies’ management teams proactively managed their cost bases to protect profitability. Another Spanish based company Viscofan, fell back as sales of its sausage skins stalled, while Italian fund management business Azimut was weak as the market fretted about signs of increased pressure on fee structures.
Although Azimut was an exception, a number of the company’s better European performers were found in the financial sectors. Shares in Norwegian based life insurance and pensions business Storebrand rose 24.7%, as solvency metrics improved, helped by an upturn in bond yields, and dividend payments are to be resumed. In the same country, Sparebank jumped as fears over bad loans diminished on the back of the uptick in the oil price. Aareal Bank was another strong performer as results impressed the market. While it was generally a tougher time for industrials, truck equipment supplier Interpump announced good results with the company’s diversification moves paying off. Flooring business Forbo, also produced solid figures. Business equipment supplier Takkt was another winner, helped by additional interest from brokers as results continued to be good.
Peter says that the Japanese small cap market performed well as sentiment towards Asian markets as a whole improved and the yen surged. The company’s holding in the Eastspring Investments Japan Smaller Companies Fund handsomely beat the local market. Peter says that the fund uses a value based approach and during the period benefited from a turn in sentiment away from some of the more highly rated defensive sectors. Some of the fund’s holdings also benefited from the indirect buying of the equity market by the Bank of Japan mentioned above.
The Rest of the World fund holdings were all up by more than 20% in sterling terms during the six months. The Scottish Oriental Smaller Companies Trust was the best performer, helped by a moderation in its discount. The Australian New Horizons Fund also did well as several of its technology and healthcare stock holdings progressed, and the Australian dollar was helpfully strong as commodity prices bounced. During the period the manager introduced a new holding in the Pinebridge Asia ex Japan Small Cap Fund. Peter says that this is run by an experienced small cap manager backed by a good team of sector analysts and performed well immediately post the purchase of the company’s holding.
F&C Global Smaller Companies broadly in line with benchmark during first half : FCS