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How did BMO Global Smaller Companies do during a tough year for small businesses?

Is small really beautiful for investors? Find out what helped, and hindered, BMO Global Smaller Companies during the year to 30 April 2019, following the release of its annual results.

Important notes

This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.

  • US smaller companies were a bright spot over the year, while Japan struggled
  • NAV total return of 3.8% compared with 3.0% for the trust's benchmark
  • Share price total return of -1.0% as the discount widened over the year
  • 49th consecutive annual dividend increase, up by 14.6% – income variable and not guaranteed

Small companies can mean big opportunities for long-term investors. A lot of them aren’t widely researched. That means eagle-eyed investors can spot hidden gems before their opportunity set is recognised. Smaller companies are higher risk than larger ones though.

BMO Global Smaller Companies recently reached its 130th anniversary, making it one of the industry's oldest investment trusts. Originally it mainly invested in overseas government bonds, but in 1975 it started to focus on the shares of smaller companies. It's since proved an astute move.

Peter Ewins took over the trust in August 2005 and he's built a good track record over that time. He invests directly in smaller companies in the UK, North America and Europe, and invests in other funds for exposure to Asia, Japanese and higher-risk emerging stock markets.

The trust uses gearing (borrowing to invest) which adds risk. You should refer to the latest annual report and accounts for details of the risks and information about the charging structure.

US a bright spot, Japanese funds struggle

The year to 30 April 2019 was a tricky one for investors to navigate.

Slower economic growth, an escalating trade war between the US and China, and the uncertainty of Brexit caused stock market volatility across the globe last year. Markets have rebounded so far this year, but the setback at the end of 2018 means returns were fairly subdued for the year as a whole.

Smaller companies also underperformed larger ones over the year, as they haven’t tended to do as well when investors are more cautious in their outlook for markets.

BMO Global Smaller Companies performed better than its benchmark and grew 3.8%, in NAV terms. Investor uncertainty saw the trust's discount widen over the year though and its share price fell 1.0%. Please remember past performance isn't a guide to future returns.

Annual percentage growth
Jun 14 -
Jun 15
Jun 15 -
Jun 16
Jun 16 -
Jun 17
Jun 17 -
Jun 18
Jun 18 -
Jun 19
BMO Global Smaller Companies 14.8% 4.2% 28.4% 10.6% -3.5%

Past performance is not a guide to the future. Source: Lipper IM to 30/06/2019

US smaller companies were the only real bright spot. Lower taxes on company profits, which boosted earnings, contributed to rising share prices across US markets. Positive stock selection in the US healthcare, energy and consumer sectors also helped the trust's performance. The Ensign Group, which operates nursing facilities, and STERIS, which provides infection protection products, were two of the top performers.

The US market has delivered some stunning returns over several years. But this means there might not be as much room for future growth and Ewins no longer thinks there's as much value on offer. So, while US smaller companies still make up a large part of the trust, he's reduced exposure here.

Outside of the US, returns from smaller companies generally disappointed. The UK market fell over the year and, in the trust, stock selection including fashion business Quiz, which Ewins later sold, were weak. He had better luck in the technology sector though. Craneware, which supplies software to US hospitals, led the way and its shares rose by an impressive 45.5%.

Japan was the one area where the trust struggled. This part of the portfolio didn’t do as well as the broader market of Japanese smaller companies.

Ewins invests in Japan through funds run by external managers, including Eastspring and Aberdeen Standard. The Eastspring portfolio was held back by its focus on sectors that rely more heavily on the health of the broader economy for their success, which were weaker. The manager sold part of these two funds over the year and bought a new holding in a Japanese fund run by Baillie Gifford, a group with a strong record in this niche area of the market.

Region Portfolio (%) Local smaller companies index (%)
UK -1.8 -3.4
Europe 4.0 -1.9
North America 14.0 10.5
Japan -9.7 -5.9
Rest of World 0.8 -4.2 (Pacific ex Japan)
0.1 (Latin America)

Past performance is not a guide to the future. Source: BMO for the year ending 30/04/2019

Manager's outlook

Ewins thinks economic and political uncertainty is likely to persist throughout the year. He plans to keep a close eye on how things develop, and this will play a role in how much the trust invests in different countries and regions.

But his main focus will be on analysing the prospects of individual companies, regardless of what's going on in the wider economy. In the shorter term he's taking a slightly more cautious approach, but over the long run he thinks smaller companies will continue to offer exciting investment opportunities and the potential for growth, although of course there are no guarantees.

More about this Trust, including charges

Key Information Document

Important notes

This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.

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