New Global Smaller Companies (GSCT ) manager Nish Patel is making his mark by ditching two underperforming funds and bringing Japanese stock-picking in-house.

Nish took over from Peter Ewins, who stepped down from the £780m trust after 26 years in May. The veteran manager, despite racking up a net asset value (NAV) and share price increase of 517% since 2005 when he became lead manager, left with a disappointing year in the rearview mirror.

Final results to the end of April reported a net asset value (NAV) increase of 9%, which despite being a solid result, lagged the company’s hybrid benchmark return of 11.3%.

The benchmark is a blend of 80% MSCI All Country World ex UK Small Cap and 20% Deutsche Numis UK Smaller Companies.

The UK and US were the main detractors from performance and the Japanese portion of the fund was the biggest contributor, returning 10.1% against the 8.6% return from the MSCI Japanese Small Cap index, but Nish has instigated a shake-up of the way the Japan allocation is run.

He has decided that ‘insourcing’ part of the fund is the best move given the poor performance of some of the trust’s fund picks. He has sold out of Abrdn SICAV I – Japanese Smaller Companies Sustainable Equity fund and the Baillie Gifford Japanese Smaller Companies fund.

‘These funds had not performed well for some time,’ said Patel.

Over the three year to the end of May, the Baillie Gifford fund managed by Praveen Kumar has decline 45.3% while the Abrdn fund run by Jun Oishi is down 16.5%.

‘Following extensive due diligence, we decided to use the proceeds from these sales to invest in a portfolio of around 30 individual Japanese smaller company equities,’ said Patel.

‘We have been able to select these stocks directly, drawing on the skills of fund managers focusing on Japanese equities within Columbia Threadneedle Investments, who have a strong track record of performance in this market.’

He added that investing in equities directly will also lower the costs as there will no longer be two layers of manager fees.

‘In the year ahead, we will continue to keep the approach to investing in collectives under review, and at the same time monitor the range of alternative funds that could be used within the portfolio,’ he said.

US and UK fall short

Although the fund made a sharp recovery in the second half of the reporting period, following a NAV slide of 6.3% in the first half, it was still held back by its underweight position to North America, even though it made up 40% of the portfolio at the end of the year versus 46% of the benchmark.

Chair Anja Balfour recognised that asset allocation positioning hurt relative performance, ‘largely reflecting the fact that we were overweight the UK and underweight North American’.

The North American portion of the portfolio added 10.3% over the year, which was below the 13.4% from the relevant smaller companies index in the region. The UK part of the fund delivered a 5.2% return, less than the 7.2% from the relevant UK index.

However, Patel still believes that smaller company valuations are more attractive in the UK, Europe and Japan compared to North America and this is reflected in the end of year positioning.

Patel grew the weighting to industrials over the year, prompted by long-term trends for nearshoring, increased fiscal spending and automation.

‘With a potential peak in interest rates, the prospect for interest rate sensitive companies changed in the year and so our exposure to the financials and real estate sectors was increased,’ he said. ‘We think that the [industrials] sector is close to bottoming.’

This led him to add metal working products distributor MSC Industrial Direct and Standex International, a manufacturer of products such as magnets and sensors, stating the latter’s ‘strong innovation culture and focus on offering its customer a compelling value proposition’.

Activity in the UK part of the portfolio was driven by additions to cyclical stocks ‘where share prices had fallen too far’ and picking up 10 new positions.

These included alternative asset manager Foresight Group (FSG) due to its potential returns from infrastructure investments, fund administration group JTC (JTC) and healthcare company Niox Group (NIOX), which has ‘limited competition and is highly profitable’.