ASI Global Smaller Companies: February 2022 fund update

• Kirsty Desson’s contributions have been recognised with a promotion to lead manager
• The team uses a disciplined and time-tested process to uncover hidden gems around the globe
• Long-term performance has been strong but inflation concerns 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

ASI 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 still part of the team though and he remains a passionate stock picker. This change enables him to dedicate more time to company research and analysis.

Kirsty Desson, the fund’s co-manager since February 2020, was promoted to lead manager. 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.

Over the past year the team has continued to expand with the addition of Domantas Butvilas. After a successful rotation with the team on his graduate program, Butvilas will now contribute US investment ideas on a permanent basis.

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

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 and so there’s plenty of opportunity to uncover the larger companies of tomorrow. That said, the companies in the fund tend to be larger than the average company in the benchmark.

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 47. 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 Watches of Switzerland, the supplier of choice for many luxury watch brands. Supply is tightly controlled in this part of the market which gives these brands the ability to increase prices without significantly impacting demand for their products. The managers are optimistic about its future prospects with big expansion plans in the US underway. The leading event ticketing company in Europe CTS Eventim was also added to the fund. With the company set to benefit from further re-opening and acquisition, the runway for growth looks attractive.

In contrast, they sold their investment in manufacturer Taiwan Union. With a significant amount of their production conducted in China, the unpredictable landscape in this region has cast doubts over the company’s quality. Other notable sales included healthcare company Amedisys and education firm Chegg.

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. The fund’s name will automatically change to reflect this in due course.

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.

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.

Cost

The fund has an ongoing annual charge of 1.05%, but we’ve secured HL clients an ongoing saving of 0.27%. This means you’ll pay a net ongoing charge of 0.78%. 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 62.15%*. It’s also done much better than its own benchmark. 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.

Global stock markets have had lots to contend with over the past 12 months. A new Covid-19 variant, global supply chain pressures and rising levels of inflation has certainly tested companies, particularly smaller ones. Over this period the fund underperformed, returning -3.55% vs 9.26% 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 higher, and many believe interest rates could rise further from here. 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.

Stock-wise, education company Chegg was one of the biggest detractors and has since been sold. The company has faced multiple headwinds from Covid-19 triggering a slowdown in the education industry and an ongoing legal case with Pearson. Cerence, the automotive software business, also had a tough end to 2021 with their sales coming in lower than the market predicted.

On the other hand, Pool Corp, a global leader for swimming pool supplies and maintenance, has benefitted from resilient demand and exceeded expectations last year. Other notable performers included media company Future plc, and manufacturer Generac Holdings.

Past performance is not a guide to the future.. Source: *Lipper IM to 31/01/2022.

** R Acc share class used to extend performance history. The standard unit class available through HL is Class S.

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