One of Tom Stevenson’s fund picks for 2025 is the Brown Advisory US Smaller Companies Fund, which offers a way to participate in the Trump Trade while avoiding the higher priced parts of the market. He says that deregulation, tariffs and tax cuts should favour the sort of domestically focused businesses that it invests in, where valuations are less stretched than the tech sector.
Brown Advisory is based in America and has an extensive team that is responsible for researching and investing in smaller companies. It is a specialist area that requires considerable expertise, which is one reason why the fund has been included in Fidelity’s Select 50.
Objective and approach
The managers invest in a concentrated portfolio of high-quality businesses with sound management teams and competitive advantages that can produce above-average growth rates over a full market cycle. Their strategy is based on a firm-wide belief that good fundamental research coupled with a long-term approach can generate attractive outperformance.
Small cap stocks tend to go under the radar, which creates a more inefficient environment for disciplined stock pickers to exploit. The fund aims to take advantage by looking for companies with durable growth, sound governance and scalable go-to-market strategies, as these qualities often enable a business to compound its earnings at an attractive rate for an extended period of time.1
What are the managers’ latest views?
Writing in their latest update at the end of September, the managers said that the evolution of the small-cap market in the US has been profound over the last two decades, with the percentage of unprofitable companies expanding to 30-50%2.
“We remain laser focused on executing our investment philosophy and process, making the best bottom-up, fundamental and long-term investment decisions possible… We… are confident that we have the right people in the right seats to execute well in the quarters and years ahead.”
The underlying portfolio
Brown Advisory US Smaller companies typically has 50 to 80 holdings and at the end of November the ten largest positions accounted for 28.3% of the assets3. These included: Bright Horizons Family Solutions, which provides child care and educational services; software developer Dynatrace; and the bank holding company Prosperity Bancshares.
Top-10 holdings
- Waste Connections
- Bright Horizons Family Solutions
- HealthEquity
- Properity Bancshares
- Dynatrace
- CCC Intelligent Solutions
- Valmont
- Fluor Corporation
- Casey’s General Stores
- ChampionX Corporation
Source: Brown Advisory, 30 November 2024
The weightings were a lot more concentrated at the sector level, where Industrials 27.7%, Health Care 23.1% and Information Technology 17.7% made up around two-thirds of the exposure. Compared to its benchmark, the Russell 2000 Growth Index, the portfolio was significantly overweight in stocks in the $10bn to $50bn bracket and underweight those in the sub $10bn category4.
Performance
Over the decade to the end of November the fund generated an annualised return of 10.1%, which was comfortably ahead of the 9.1% produced by its benchmark. The performance over shorter time periods has been extremely volatile with historic 12-month gains of more than 30% and losses of up to 20%5. Please remember past performance is not a reliable indicator of future returns.
How do the costs stack up?
The latest ongoing charges figure is 0.85%, which seems reasonable for a specialist area like an overseas smaller companies fund.
Who is it suitable for?
A higher risk option like this is likely to require a long investment horizon of ten years or more to allow the extra returns to come through. Those who are comfortable with this may find it a useful diversifier if they are looking to add more volatility and potential reward to their portfolio.
More on Brown Advisory US Smaller Companies
| (%) As at 31 Dec | 2019-2020 | 2020-2021 | 2021-2022 | 2022-2023 | 2023-2024 |
|---|---|---|---|---|---|
| Brown Advisory US Smaller Companies | 28.6 | 9.1 | -10.3 | 6.5 | 6.6 |
Past performance is not a reliable indicator of future returns
Source: Morningstar, total returns from 31.12.19 to 31.12.24. Excludes initial charge.
1,3,4,5 Brown Advisory, 30 November 2024 factsheet
2 Brown Advisory commentary, 30 September 2024