Japan firms sweet spot for UK fund

Making huge pots of money from investing in a portfolio of smaller companies has proved tricky in recent years as economies have faltered – and both interest rates and inflation have soared.

The only consolation, as far as shareholders in one of the biggest investment trusts operating in this space are concerned, is that dividend income has continued to increase. 

For the 53rd consecutive financial year The Global Smaller Companies Trust, has just pushed up its dividend and its manager Peter Ewins is confident there is higher income to come in the future.

‘Of course, a global recession could upset the apple cart,’ says Ewins. ‘But the rising income from our portfolio reflects the kind of growth stocks we hold. Growing businesses, with robust balance sheets and sufficient pricing power to combat inflation, are often well placed to pay dividends.’

In the last financial year, which ended on April 30, the £728 million trust saw the income from its holdings increase by 28 per cent. 

Although a little bit of this income was tucked away in the trust’s reserves (to be paid out when times are tougher), shareholders still received a healthy 25 per cent increase in dividends.

‘It’s probably the most pleasing aspect of the trust’s performance in the financial year just gone,’ says Ewins with some holdings such as UK-listed Energean (a natural gas producer) paying dividends for the first time.

Like all trusts investing in smaller companies, the total return numbers are less impressive. Over the past year, the trust has delivered a loss of 2 per cent. Over five years it has registered a small gain of 4 per cent. Among its peers, only Herald has a better performance record over these two time periods.

Ewins says the fortunes of smaller company funds are unlikely to improve until both interest rates and inflation start falling. ‘We need to see rates and inflation peak in the US,’ he says, ‘before investor interest in smaller companies is reawakened.’ 

More than 40 per cent of the trust’s portfolio is based in US-listed smaller companies.

The trust is managed from London and currently has 190 direct holdings. It also has stakes in eight investment funds which provide the trust with exposure to smaller companies in Japan, Asia more generally and emerging markets.

Ewins says Japanese smaller companies have been a bit of a sweet spot for the trust as the Japanese economy has not been impacted by the kind of interest rate rises across Europe, the United States and the UK. Indeed, two of its top five holdings have been Japanese smaller companies run by investment houses Eastspring (based in Singapore) and PineBridge (owned by Asia-based Pacific Century Group).

Other big contributors of positive return in recent months have been UK confectionery wholesaler Kitwave and US buildings materials supplier Eagle Materials. Ewins says Kitwave is ‘not in a sexy line of business’, but has benefited from a number of shrewd acquisitions. Over the past year, its share price is up by more than 90 per cent.

Eagle Materials, he says, has enjoyed strong demand for its products – everything from cement through to gypsum – as a result of the US government’s decision to improve infrastructure. The trust has also generated returns as a result of holdings, such as industrial consultants RPS Group and waste management group Biffa, being bought at attractive prices, crystallising profits. The trust is part of US investment house Columbia Threadneedle, annual charges are 0.75 per cent, and its stock market ID code and market ticker are BKLXD97 and GSCT respectively.