Abrdn Global Smaller Companies: March 2023 fund update

• Kirsty Desson has over 20 years of industry experience and has been lead manager since 2020 following her impressive contributions as co-manager
• The team uses a disciplined and time-tested process to uncover hidden gems around the globe
• Long-term performance has been strong but high inflation and high interest rates have impacted recent returns
• This fund features on our Wealth Shortlist of funds chosen by our analysts for their long-term performance potential

How it fits in a portfolio

abrdn Global Smaller Companies aims to grow an investment over the long term. Fund manager Kirsty Desson and her team hunt for the world’s big companies of tomorrow using a time-tested tool known as the ‘matrix’. By investing globally, the fund could offer diversification to a UK-focused investment portfolio with exposure to different regions and themes. Whilst smaller companies have more room to grow than larger ones, they do carry more risk. This fund could also complement an adventurous growth-orientated portfolio investing in large or smaller companies.

Manager

In December 2021, veteran smaller companies’ investor Harry Nimmo stepped back as co-manager of this fund. He’s now subsequently retired from the industry, leaving Kirsty Desson as sole lead manager.

Desson has been the fund’s co-manager since February 2020, before being promoted to lead manager in December 2021. Her career began at Martin Currie in 2000 where she analysed companies in Asia and emerging markets. In 2012, she joined abrdn (which was then Standard Life) to focus on smaller companies within Asia, including Japan and emerging markets. Over this time, she’s built analytical experience and been heavily involved in the fund’s success.

Fund managers come and go and it’s only natural to associate their departure with the potential for change. In this instance though, we don’t expect much to change. Desson and Nimmo use the same investment philosophy and have worked together for the best part of a decade.

The US accounts for a substantial part of the team's investment universe and is overseen by Anjli Shah and Domantas Butvilas. Shah is an investment director within the team and has over a decade’s worth of experience in the industry. Alongside this fund, she is also the manager of the Global Mid Cap Equity fund.

Process

Desson and her team hunt for companies around the world outside the usual candidates of large firms that dominate stock markets. They believe smaller companies have greater long-term growth potential and are relatively under-researched, so there’s plenty of opportunity to uncover the larger companies of tomorrow.

Hunting for sustainable growth over the long term means the team doesn’t invest in more economically sensitive parts of the market like energy or real estate. Their focus on quality leads them to companies with strong balance sheets and good management teams whilst avoiding those that are highly indebted or loss making. Momentum is also important, which means the team likes to run their winners and cut their losers.

To identify these attributes, they use a quantitative tool called the ‘matrix’ which whittles down the universe of over 6,000 companies. The matrix output is continually reviewed, and the most attractive opportunities receive further analysis and team debate. They focus on the data for individual companies, rather than broader economic views.

This results in a fund of between 40 to 80 companies, they currently hold 45. This means each holding can make a meaningful contribution, but it can increase risk. Around half the fund is invested in the US, although this is less than the global stock market. In contrast, they invest more than the stock market in European countries such as the UK, Italy, and Germany. The managers also invest in higher-risk emerging markets and can use derivatives, which if used adds risk.

Recent investments include Aspeed, the founder-ran Taiwanese designer of semiconductor chips. Global server demand is currently enjoying good tailwinds on top of which Aspeed is gaining share through further upgrades, wider product adoption and new product launches. Envista was also added, the US supplier of consumable equipment and services to the dental industry. The company’s market share is high thanks to the breadth of its product offering.

In contrast, they sold Maximus, the US operator of government health and HR programs. Growth is forecast to return to low single digits. Sleep Number was also sold, following a poor set of results and disappointing meeting with management. Results and guidance were well below expectations on the back of supply chain issues.

Culture

The fund was previously part of Standard Life plc, until the business merged with Aberdeen Asset Management in 2017 to create Standard Life Aberdeen plc. This later became Aberdeen Standard Investments and in July 2021, the company changed name once again to abrdn in order to simplify and unite under one single brand.

While mergers have the potential for disruption, we think the smaller companies team, which also includes UK and European funds, were relatively unaffected. There’s a collegiate feel to the smaller companies team at abrdn. Members share research and ideas with each other, and work with one another to debate and challenge stock decisions.

ESG Integration

Although the manager's process doesn’t specifically exclude any particular area, ESG (Environmental, Social and Governance) considerations form a part of company analysis. The managers engage with companies where they feel there are serious ESG issues and use their right to vote at shareholder meetings.

abrdn is a firm well known for its commitment to ESG. Responsible investing has been part of the business since it set up its Corporate Governance team in 1992 and launched its first ethical fund in 1994. We like that the firm’s policy positions on a range of divisive issues, from plastics and tobacco to palm oil and biodiversity, are easily available on their website. The firm also produces several ESG-related thought leadership articles on a monthly basis, a fortnightly podcast series and a quarterly Active Ownership report. We’re pleased to see that the firm’s commitment to ESG has filtered down to the fund level. abrdn fund managers generally see themselves as owners of businesses, not investors, and stewardship is an important part of their investment processes. The firm exercises all voting rights and engages with management to encourage best practice.

ESG and stewardship factors are included in every stock research note and each firm receives an ESG score, based on its ESG credentials and its ability to manage ESG risks. All managers have access to a central ESG team, as well as specialist on-desk analysts.

Cost

The fund has an ongoing annual charge of 1.05%, but we’ve secured HL clients an ongoing saving of 0.28%. This means you’ll pay a net ongoing charge of 0.77%. The HL platform fee of up to 0.45% per year also applies.

Performance

Since the fund launched in January 2012, it’s delivered some impressive returns. Over this period, it’s outperformed the IA Global sector average by 32.49%*. Remember past performance doesn’t indicate future returns.

Although the majority of this performance cannot be attributed to Desson, she’s played an important role, particularly in Japan, Asia, and emerging markets. She’s also managed a similar global smaller companies’ portfolio since early 2019, where we believe she’s delivered growth primarily through her stock picking ability.

Given the focus on quality companies we expect the fund to hold up relatively well when markets fall. In contrast, we expect the fund to lag the peer group when markets rise quickly. However, this was not the case over the last 12 months as the fund performed poorly as the market rotated from growth to value.

Global stock markets have had lots to contend with over the past 12 months. Rising levels of inflation, rapid increases in interest rates across the world as well as the Russian and Ukraine conflict has certainly tested companies, particularly smaller ones. Over this period the fund underperformed, returning -7.02% vs 1.64% for the IA Global sector.

The manager’s growth-focused investment style has had a particularly tough time since the start of 2022. Increased price levels have forced interest rates to the highest levels in recent times. Higher interest rates reduce the value of a company’s future cash flows. All else being equal, that’s bad news for growth-focused companies. The fund’s investments in the US and industrials sectors have felt the most pain but the team will stick to their process and continue to focus on the long term. The fund’s performance in the last 6 months has been much stronger. The manager's stock selection in Information Technology and Consumer Discretionary contributed to a better second half of 2022.

Stock-wise, multimedia company Future Plc was one of the biggest detractors and has since been sold. The team were concerned for the UK’s economic outlook and the resulting impact on advertising and consumer spending. Sleep Number, the manufacturing of bed and accessories business, also had a tough end to 2022 with results and guidance below expectations on the back of supply chain issues. This has been sold from the fund.

On the other hand Lattice Semiconductor Corporation, the American semiconductor company, was the biggest contributor. Lattice posted strong earnings as well as a growing demand across the business. The team believe the outlook looks positive for the company.

Past performance is not a guide to the future. Source: *Lipper IM to 28/02/2023.

Find out more about abrdn Global Smaller Companies fund including charges

abrdn Global Smaller Companies Key investor information