Fund manager Chris Berrier is hopeful that US smaller companies will attract some of the popularity experienced by the largest companies in the S&P 500 that have soared in recent months. 

US mega-cap technology stocks are now viewed as more of a safe haven than in previous cycles, he told Citywire. This, as well as being enablers of artificial intelligence, has driven shares in the likes of Apple and Google-parent Alphabet up more than 40% this year. 

That performance has not been reflected at the cyclical growth end of the spectrum, where Berrier’s £140m Brown Advisory US Smaller Companies (BASC ) trust invests. 

This area of the market has struggled because smaller companies are traditionally associated with the strength of the US economy. 

The company is down 3% year to date in sterling terms, according to Numis, largely because of increased market volatility, and its discount is 17.6%.

However, Berrier is optimistic that smaller companies could get a look in soon.

He said that if the US economy were to trough and start its recovery in the coming months, it would make sense for investors to have cash in smaller companies, which should bounce back first given they are more cyclical.

‘The good news is that smaller-cap companies tend to benefit a lot after periods of intense consolidation in the equity market. When too much capital goes into too few entities, at some point, that capital has nowhere to go but to leave,’ Berrier (pictured) said.

Since Brown Advisory won the smaller companies mandate from Jupiter in April 2021, the shares have fallen 16.4%, in line with sector peer JPMorgan US Smaller Companies (JUSC ), both of which trail the Russell 2000’s 6.3% fall, according to Morningstar data. 

By comparison, the S&P 500, which tracks the 500 largest companies in the US, has risen 22% over the same time period.

Winners and losers

Biotech company Abcam, which is headquartered in the UK, has been one of the strongest performers year to date. It put itself up for sale in June after founder and former chairman Jonathan Milner tried to wrest back control.

Childcare provider Bright Horizons has rebounded hugely since Covid, decreasing its waiting list, speeding its hiring rate and taking market share, which has pushed the shares up 43.7% year to date.

The sole bank in the portfolio, Prosperity Bancshares, which serves Texas and Oklahoma, was impacted by the general selloff following the collapse of Silicon Valley Bank in March, with the shares down 17.6%. 

The portfolio has a 22% weighting to technology, 20.5% in healthcare and 18% in industrials, with the largest individual stock positions including rubbish collector Waste Connections, Bright Horizons and Abcam, which have respective weightings of 3.5%, 3.1% and 2.6%.

Berrier said he favoured the SPDR S&P Biotech exchange-traded fund, which makes up 2.2% of assets, over individual companies in the sector because it avoided the problem of building cash in the position and made sure risk levels did not increase given the sector’s volatility.  

Cash levels of 7% are a reflection of recent exits and trimmings, but will fall below 5% following the completion of several ongoing purchases, he said. 

Returns under Brown Advisory 

Source: Morningstar