Global Smaller Companies Trust (LSE:GSCT) — Annual General Meeting

0:02 Well, thank you very much and good afternoon, ladies and gentlemen, welcome to the Chartered Accountants Hall. It is now two minutes past twelve and time to commence our one hundred and thirty sixth Annual General Meeting. And a very warm welcome to everyone in the room and those of you watching online. Can I just check that you can all hear me clearly? Please at any stage, if you cannot hear me or any other speaker, let us know. The company secretary has advised that a quorum of members is present and accordingly I declare the meeting open. I'd like to introduce you to the board and you can find brief details relating to each director on pages forty six and forty seven of the annual report.

0:55 On my right is Nick Bannerman, Chairman of the Audit and Management Engagement Committee. Next to him is Graham Aldroyd, the Senior Independent Director, and next to him, Randeep Grewel. On my left is Ian Ridge, the company secretary, Bulbul Barrett and Zoe King. Before the formal business, I would like to begin by explaining the format of the meeting. In a moment, our lead fund manager, Nish Patel, will give you an update on the company's performance and talk about prospects in more detail. You will then have the opportunity to ask questions on his presentation, the annual report and financial statements, the resolutions in the notice of the meeting and any other relevant matters which shareholders wish to raise.

1:50 On completion of the meeting, I would invite those here in person to join the directors for refreshments when you have the opportunity to meet us and Nish more informally. Now I would like to invite Nish to make his presentation. Sorry, there's a question in the audience. Here, there's one being handed to you now. Sorry about that. Thank you, Nick.

2:31 Well, good afternoon ladies and gentlemen, and welcome to the AGM of the GLOBAL SMALLER COMPANIES TRUST. Thank you for making it in today. I know it is hot outside and you've come from far and we really do appreciate your interest in the company and we're glad to have you here. I'd like to really go over six different areas today. First of all, just to set the context, want to talk a bit about the market environment over the twelve months ended the April 30. We'll go through the results for the period. There have been a number of changes in the financial year, and I'm quite keen to go through some of those changes and make you aware of them. We'll talk a bit about the long term performance track record, what we've been doing on the portfolio, and how we're positioned, and finally we'll wrap up with the outlook.

3:25 So I'll start with the market environment, and what a year it was in terms of politics. It was a year of significant political change half the world's population actually went to the polling booths in 2024. One thing that was very apparent was that there was a lot of unhappiness with high levels of inflation and a lot of inequality. And for the incumbent parties that meant that there was a lot of incumbent parties that were changed with new alternatives. We saw trade tensions escalate, particularly towards the end of the financial year. And the world order that has really been in place since the end of World War II, that really has changed now.

4:16 The conflict is ongoing in the Ukraine and The Middle East. We've seen very healthy labor markets, and we've seen high asset prices, and that's helped the consumer. So economic growth was pretty solid, I would say. We've also seen governments all over the world spending a lot of money on fiscal programmes, and the private sector has spent vast amounts of capital in areas such as artificial intelligence. All of these things have generally been very supportive for economic growth. Over the year, we did see inflation moderate, and that allowed several central banks to start cutting interest rates. It was very unusual because we saw the start of an interest rate cutting cycle, but at the same time bond yields, longer dated bond yields in particular, they did stay high, which is unusual. And I think part of this is because the bond market became concerned about inflation potentially staying higher for longer, and also the size of government budget deficits.

5:25 The dollar, which has strengthened really for the best part of sixteen years, actually weakened from January. And part of the reason why that is, is because I think foreigners, they have a sense that they don't really want to invest so much in The US, given the uncertainty. There was lower demand from foreigners for US assets generally. And The US lost some of its safe haven type appeal during the year. It was mixed performance from smaller companies in general. North America and the rest of the world had a more challenged year, because those are the two parts of the world that are more impacted by tariffs. But The UK, Europe and Japan, they delivered moderate returns over the year.

6:10 We saw volatility pick up, particularly towards the end of the financial year, and especially around the beginning of April when we had those initial announcements for tariffs.

6:24 Performance wise, I'd really like to start by saying that it was a challenging year for the company. The NAV and the share price were behind the benchmark, and we are disappointed by that. And I do want to provide you with detail on what the drivers were behind the underperformance. But more importantly, I want to go through what we're doing to put the company in a better position to deliver future performance versus the benchmark. The NAV was down by 4.8% over the twelve months to the April 30. The benchmark fell by 0.8, and the share price was down by 5.6%. We saw a slight widening in the discount from 10% to 11% over the financial year, which is roughly in line with what happened with the AIC sector more broadly.

7:15 The dividend per share was raised by 6.8%, and this is reflective of the cash flow generation of the companies that we have invested in. They had another good year of income allowing us to raise the dividend by 6.8%. And that is now fifty five years that we have raised the dividend consecutively, which is a track record that we are really proud of.

7:40 So going into the detail on the various regions, I'm going to start with The UK, because that's where most of the underperformance came from for the trust. And there are three things really that drove this. So over the year, we had about 21% of The UK portfolio invested in companies that were listed in the alternative investment market, or the AIM market. We do like under followed businesses that are high quality companies. And one thing that we noted with the AIM market in particular was that there was a lot of concern, particularly in the lead up to the budget, about the removal of inheritance tax exemption on AIM related investments. As a result of that, many AIM companies did see declines in their share prices, and we did suffer from that because we had about 21% of The UK portfolio invested in those companies.

8:33 The UK more broadly has been in outflow, or active funds with UK assets have been in outflow for about four years now. And that has also been an impact on our UK portfolio, because many of the active funds in The UK market do own similar companies. So even if another fund has an outflow, that is impacting us, even if we don't have an outflow ourselves. So that has been a challenge. And then there were some stock specific issues. The two more notable ones were NEXT fifteen and YouGov, and I can go into more detail on those. Europe was behind its benchmark because of three reasons. First of all, the China facing businesses within the European portfolio, so companies such as ASM International and TICAN Group, did suffer from a slowdown in the Chinese economy.

9:28 Secondly, the European portfolio is exposed to the auto sector. And we know that the auto sector has been in the doldrums because the subsidies on electric vehicles have been curtailed. We've also seen higher interest rates affect the demand for vehicles, and competition has intensified in the auto sector more broadly. Germany really changed tact during the financial year. They decided to loosen their fiscal stance and to spend more money on areas such as defence and infrastructure. We were somewhat caught on the wrong side of that. We didn't have enough defence and infrastructure companies, but we did address that later in the financial year.

10:13 In North America, we're slightly behind, and mostly this is in October November timeframe, where the market became very excited about the potential election of Donald Trump and his economic policies. However, performance did pick up later in the financial year, as the market realised that some of these policies will be quite hard to implement in practice. In Japan, we were ahead of the benchmark by about 4%, which is pleasing. And in the rest of the world, we also outperformed in that region. We outperformed the Asia Ex Japan smaller companies index, and we also outperformed the Latin American smaller companies index. So I'm going to go into just some broader themes on the individual stocks.

11:01 I won't go through all of these, but just to give you a flavor of the common themes that we saw. So on the positive side, it was a year of uncertainty. And in a year of uncertainty, you typically do see safer assets or more stable assets do well. And for us that meant gold and insurance. So our holdings in Brown and Brown and Wheaton Precious Metals both benefited from strong performance in those sectors. Defence is another area where we saw good performance, with our holdings in RENC, Curtiss Wright and Kinetic. Clearly that was because many governments are now ramping up their spending on defence in this new world that we're living in.

11:47 We do have a cohort of long term growth businesses, or what we like to refer to as compounders. And they do span a whole host of different sectors, and they had another year of earnings progression. And because they grew their earnings, the share price did react to that. And examples of that include Encompass Health in The US, Auction Technology Group in The UK, and CTS Eventim in Europe. It was a good year for takeovers, so we had seven takeover bids in the financial year, which is pleasing. And in Japan, where we have found a lot of success is in these idiosyncratic situations where companies are improving their corporate governance standards or their capital allocation policies, and the share prices of those companies is reacting to that.

12:40 On the negative side, we had some stock specific issues at WEX, YouGov, and NEX fifteen. Those were the three kind of more stock specific problems within the portfolios. The lower oil price certainly didn't help Kirby, Ashtead and Cosmos Energy. Oil fell by 28% over the financial year. And then we saw some sector weakness in autos, as I mentioned, but also semiconductors outside of intelligence. Higher input costs was also hurtful for companies in the consumer staples space, because it crimped those companies' profit margins. So I'll talk a bit about the changes that we've made over the financial year. So there have been changes to the structure of the investment team and within the investment team.

13:33 We think that the investment team has been strengthened over the financial year and is now well placed. There are nine people in this investment team. The average experience on the team is twenty years per person, which I think is really important in an uncertain environment. We've also in sourced the remaining third party Japan fund that we used to hold with eSpring. That has been brought in house, which we think is a positive move because first off, it gives you access to our Japanese equities team who have a really good long term track record, and it also lowers cost for you. So we thought that was a sensible thing to do during the year. We've reduced down the number of holdings from two thirteen to 196.

14:19 And that does allow us to concentrate your capital on the very best ideas that we're finding. We've also refined our approach to selling investments. I think in the past, we've been guilty of perhaps holding some investments where the thesis is not playing out. We've been holding them for too long, And now we're looking to cut our losing positions earlier. That's a change that we've made. And then we have also made use of some of the more additional resources that are available to us as a result of the takeover of BMO, GLOBAL ASMANGMENT, by Columbia Threadneedle. So for example, as part of the transaction, we now have access to the central research team of analysts.

15:08 There are two research teams. One's based in The US, and they have 27 research analysts. They cover a wide range of sectors. And we have 15 analysts in Europe who also cover most of the sectors there as well. So we're now working much more closely with these central research analysts to glean information on the companies that we already own and to find new ideas. And we think that can be important in improving future performance. In addition to that, we are working more closely with our multi manager teams in picking third party funds for the emerging markets. On the discount, we have made a number of changes to address the discount. So the first thing we've done is we have ramped up the buyback activity on this trust. So in the last twelve months, or the twelve months ended the April 30, we bought back just over 47,000,000 shares.

16:04 So that's just under 10% of the starting capital of the company. That compares to 30,000,000 shares in the year before, just under 6%. So there's been a significant increase. We've also ramped up the marketing activity on this fund, and there's been more activity on PR as well. This is all in a bid on the marketing and the PR side to try and find new buyers of this trust to try and narrow this discount. So this is the performance track record over the last twenty five years. Philosophy and process hasn't really changed a lot over the last twenty five years. There have been some tweaks, but it's largely stayed consistent. We take a long term conservative approach to buying good quality growing businesses at an attractive valuation.

16:58 And over the last twenty five years, the share price is up by seven fold, and that is higher than the MSCI All Country World Small Cap Index, The UK Small Index, the MSCI World and the FTSE one hundred. So there's been plenty of evolution over the last year or so. We think the changes do put this company in a better position. It's encouraging the last five months of the financial year did see a pickup and improve in performance after a really difficult September, October, November. We were ahead of the benchmark in the last five months. Financial year to date, there has been a rapid rise in the markets. I'm sure you've noticed really since the lows that we saw in April. The market is up by about 13.6%, the small cap market.

17:48 This is as of the August 12, the close of business. The NAB is up by 13% for the company and the share price is up by 13.4%. So we are pulling out all the stops to try and keep up with this rapidly rising market that we've seen really since the lows in April. So this gives you an idea of what we've been buying in the portfolio. I won't go through all of these, but I thought it just, it would be useful for you to understand what we're doing by just giving you a couple of examples. So I'm gonna start with Shark Ninja, which is a business that's listed in The US. This is a founder led company. So the founder owns 43% of this company, which is a situation that we particularly like, where a founder really has skin in the game and is still involved with the company.

18:42 Those types of situations generally work out quite well for shareholders. The company produces high quality appliances for the home at low prices. They have a very strong brand because of extensive marketing. And they have a really good track record of innovating new products and bringing them to the market at speed. They've got a very wide distribution that spans multiple channels. And because of these advantages, they have been taking a lot of market share, particularly from the likes of Dyson, who can't compete with them on price. They're entering into new geographies and they're taking their existing products, which are under penetrated in some geographies and offering the full line. So for example, in The US market, they have 37 products.

19:31 They only have half of that in The UK. So you'll be seeing more of these products come to the shelves in The UK as they roll that out. And they're still early in Europe. The shares were very out of favor because there was a lot of concern about tariffs. But we think that those concerns were overblown because the company will be fully out of China by the end of the year. So their exposure to tariffs will come down significantly. Another business that we bought shares of in the year is SSP Group. SSP is an operator of food and drink concessions in railway stations and airports. And during the 2010s, this business had a really good track record, particularly under the CEO Kate Swan. And during the COVID period, obviously times were more difficult because not many people were traveling through airports or railway stations. So revenues dried up for the company. And at the same time, they were making investments for new contracts and Europe weakened.

20:31 But we thought that the quality of the business, the core quality characteristics of the business were unchanged and the share price was very depressed. And those core quality characteristics, what are they? So SSP really does understand very well what travelers all over the world and consumers all over the world want in terms of concessions in railway stations and airports. They understand that very well. They are very well placed from a logistics standpoint. It's difficult to operate in an airport where there are security requirements are very high, But SSP has a good track record there. And they've invested really quite a lot of money in technology. And the incentives make this business a strong business from the perspective of, if you're an airport operator or railway station owner, your paid or your rents are a function of the revenues that the operators generate within their concessions.

21:28 So the operators will always choose the concession company that will be able to generate the highest revenues. And SSP Group, because of its broad range of concepts and its understanding of the consumer, scores really well here. And the company was available at 11 times earnings. And in the past, the shares have been trading on 20 times when growth has been good. So the shares were very undervalued for a high quality company. On the sales side, I have outlined our broader approach to selling businesses. So we generally sell if we have an issue with the quality of the business model or the management team that deteriorates. If the investment thesis breaks, if the shares perform well and reach a full valuation, or if we find a better alternative.

22:22 Now during the year, we had an issue with OSB Group, where the management team, they did miss their forecasts a number of times, And they had a number of missteps, and that led us to switch, or to sell that holding and to sell into something else, to buy into something else. Remy Cointreau, which is a producer of cognac and brandy, they were locked out of the Chinese market because of trade restrictions. And we think that impacts the growth profile of that company, so we have sold that position. There were a number of takeovers in the portfolios, so seven takeovers in total. In the new financial year, we've had a takeover for Alpha Wave, and we've also had a bid for Skechers as well.

23:13 So this gives you an idea of the positioning at the moment. This is a truly global fund. And we have invested in over 40 countries all over the world. Our absolute weighting and our relative weighting in North America, Japan, and the rest of the world has climbed a little. It's come down a bit in The UK and Europe. Versus the benchmark, we are overweight Japan. Japan is an area that we like at the moment, because there are a lot of these idiosyncratic opportunities where companies are improving their corporate governance or capital allocation. And Japan has actually returned to inflation after several years of being in disinflation or deflation.

23:59 And that has changed the prospects for many businesses in Japan. So we are happy to have a 2.1% overweight position in Japan. In Europe, things have changed from a growth perspective, because European governments are now spending more money, particularly in areas such as infrastructure and defence. And they're trying to pick up their growth rate. And that is encouraging for many companies there. In the rest of the world in North America, we are underweight. In North America, we are finding the valuations somewhat challenging. The market has become a little bit more speculative, I would say, particularly since April. So we are underweight there. And in the rest of the world, that part of the world will be more affected by tariffs and trade issues.

24:45 From a sector perspective, our industrial weighting has picked up a bit, because we have bought more companies infrastructure and defence, in consumer discretionary. That has also grown a little, because we have bought some companies in the housing sector, and we've taken some profits in materials. So this is our portfolio on an aggregate basis in terms of quality and valuation metrics. And our philosophy and process should be reflected in these numbers, and it is. So when you look at the portfolio on a median basis versus a benchmark, we do have better quality metrics, with higher gross margins, operating margins, return on equity, and lower levels of leverage. At the same time, you have ownership of these companies at a more attractive valuation than the benchmark.

25:37 Lower multiples of sales, lower multiples earnings, and a higher dividend yield. So we think the portfolio is very well placed versus the benchmark. So I'm going to turn to the outlook, and it's very difficult to call the outlook today. It is a very uncertain time. There are lots of cross currents affecting economies and markets. I think volatility is here to stay. I think it's important to be agile and nimble in this type of an environment. There's plenty of uncertainty over what the tariffs might do to economic growth and inflation, and we don't have the answer to that yet. Government deficits has been a problem for a really long time. And with bond yields, particularly longer dated bond yields staying high, maybe the bond market is becoming more worried about it than it has been in the past. So perhaps this situation needs to be addressed sooner rather than later.

26:35 On the positive side, we could see a pickup in economic growth. That's a possibility. And it could happen from a number of different areas. So there has been talk of deregulation in The US and potentially in The UK. Many governments are spending lots of money on various programmes. We've seen corporate reform in Japan, and that is now moving to Korea. A lower dollar is not all bad news. It's good for the emerging markets, and interest rates coming down is also very good for certain sectors of the economy, such as housing. All of these things can be good for economic growth. So in this uncertain environment, we are preferring businesses that are going to do well regardless of what happens to the economy and to markets. We want companies that can protect your capital first and then can look to grow it. That's what our mantra is at the moment.

27:31 This asset class is very attractive over the long term. It's been underperforming for a very long time now, but we think that small caps have genuine potential for a very strong recovery. And I want to perhaps illustrate this with a chart.

27:50 So the charts here show you on the top chart, is showing you smaller companies versus larger companies over the last one hundred years. So it's a proper long term chart. Smaller companies do outperform. This is known as the small cap premium. So smaller companies generally deliver faster earnings growth. They're not very well known by the investment community, so as they become better known, you do see valuations of them expand. But what is very clear from the top chart is that there are cycles to small cap and large cap performance. Normally the cycles average about twelve years, sometimes shorter, sometimes longer. But on average, about twelve years. So the relative valuations of smaller companies versus larger companies is one of the determinants of how these cycles manifest.

28:42 And that is shown in the bottom chart, which is showing you the PE ratio of smaller companies versus larger companies. The lower you are on this chart, the more attractive smaller companies are. And the green arrows are showing you the start of previous small cap cycles. So I'm going to talk you through these three green arrows just to give you a demonstrate how this might, turn out. So the left hand arrow, the arrow on the left hand side is $19.74. Larger companies were very expensive. They were driven by the Nifty 50 stocks in The US. Really high quality companies that everybody loved and bidded up to very high valuations. Smaller companies were very cheap versus larger companies. If you look at the bottom chart and the green arrow on the left, they were one standard deviation cheap.

29:31 And because they offered a better investment proposition, they actually went on to outperform all the way up to 1983. The second green arrow shows you the late 90s. So this is the .com bubble. Larger companies were very expensive. Cisco Systems was a 100 times earnings. Smaller companies were very cheap. They were one standard deviation cheap, again. They went on to outperform for twelve years. The third arrow on the right hand side shows you where we are today. Larger companies, very expensive, dominated by the magnificent seven, highly concentrated market, 30% of the S and P 500 is in seven stocks today. Smaller companies are very cheap versus larger companies. Again, one standard deviation cheap. So we would be very happy if history does repeat.

30:22 We think the valuations are there, the sentiment is there as well for smaller companies to come back. And if they do come back, you as shareholders will benefit from that, given that this trust invests in what we think are the very best small cap opportunities all over the world. So I will summarise by saying it has been a challenging period for investment performance in 2024 and 2025 versus the benchmark. We have taken measures to improve future performance. Performance looks like it's stabilising. Versus the peer group, we do have a good track record. This is the best performing fund over five years as of the end of the financial year in the GLOBAL SMALLER COMPANIES AIC peer group. The long term performance of the company is strong.

31:09 The environment is very uncertain at the moment, and we think the portfolio is really well positioned in this uncertain environment, and that the asset class can come back, and that you as shareholders can benefit from that. So before I hand back to the Chair, it is the last day today for the Chair on the Board of the GLOBAL SMALLER COMPANIES TRUST. She is retiring today, so I'd like to take the opportunity to thank her for her support over the years and for everything that she has done for the company. And I do wish her the very best in the future.