Page 26 - DIY Investor Magazine | Issue 36

Dec 2022 26
DIY Investor Magazine ·
Value may be en vogue, but it’s growth that ultimately delivers returns for shareholders... by David Kimberley
US small caps have had a volatile couple of years; QE policies adopted during the pandemic helped drive share prices to record highs.
Subsequent rate hikes amid rising inflation have had the opposite effect, pushing valuations back down to levels more in line with historical norms.
Predicting future outcomes feels like a fool’s errand under most circumstances but even more so today, with the turmoil of an energy crisis, inflation and the most serious conflict in Europe since the end of WW2.
So, it is hard to say if the market for US small caps has bottomed out; there could always be further headwinds that materialise, but for investors that believe in the market’s long- term potential, there may be some room for optimism.
Just as more speculative investment during the pandemic lifted share prices to irrational highs, so too has this year produced undiscriminating selloffs, which may provide opportunities for managers willing to stick out current volatility.
Chris’s approach has remained consistent over the years, with the BASC team looking for companies that have what they call “3G” characteristics – durable growth, sound governance, and scalable ‘go-to-market’ strategies.
The idea being that companies which display these traits are more likely to be able to generate compounding returns over the long-run, as they move from small cap to large cap status.
As the growth ‘G’ suggests, BASC tends to have a more growth-oriented tilt to its portfolio. In a year where value has started to perform well after a period in the doldrums, that may not sound as appealing as it once did. But keep in mind a couple of factors.
BASC’s focus on growth does not mean buying at massive valuations or speculating; valuations remain important and must be balanced against earnings growth prospects and how well a company is managed.
Even if a company has good growth prospects, the managers won’t invest if its valuation is overinflated.
BASC is also focused on delivering over the long-term, not catering to market trends.
INVESTING IN SMALL-CAPS?
DON’T PICK UP ANY CIGARETTE BUTTS
Navigating choppy macroeconomic waters isn’t straightforward,
Value is having its day in the sun, but it’s far from clear that
but the managers at Brown Advisory US Smaller Companies
will continue, nor is it easy to see how smaller companies with (BASC) have experience dealing with market downturns.
limited growth prospects can deliver meaningful compounding
Portfolio manager Chris Berrier has run the US small cap strategy at Brown Advisory since 2006, helping investors weather the fallout from the GFC shortly after he took up the role. He was also a small cap analyst at T Rowe Price when the Dot Com bubble burst.
Such experience shouldn’t be overlooked, as plenty of managers only entered their roles during the Bull Run and period of ultra-low interest rates of the past decade or so.
returns for shareholders over prolonged periods - something Chris touched upon when he spoke at our recent event:
“If you’re going to invest over the long-term, you can’t walk around picking up cigarette butts,” he noted. “You have to focus on businesses that have enduring qualities that are going to last. And that means they have to be able to grow.”
Finding these businesses can seem a daunting task, because it’s hard to look through the macroeconomic noise.