Global Smaller Companies Trust (LSE:GSCT) — Investor update

0:01 Good morning, ladies and gentlemen, and welcome to the GLOBAL SMALLER COMPANIES TRUST PLC Investor Presentation.. At any time via the Q and A tab that's just situated on the right hand corner of your screen. Please just simply type in your questions and press send. The company may not be in a position to answer every question it receives during the meeting itself. However, the company can review all questions submitted today and will publish your responses when it's appropriate to do so on the Investor Meet company platform. Before we begin, we would just like to

0:32 submit the following poll. And if you could give that your kind attention, I'm sure the company would be most grateful. And I would now like to hand you over to Nish Patel. Nish, good morning, sir. Good morning, Jake, and good morning to all of you on this webinar. Thank you for your interest in the GLOBAL SMALLER COMPANIES TRUST. So I know that there will be a mixture of investors. Some will be familiar with the GLOBAL SMALLER COMPANIES TRUST, and some will be listening to this story for the first time. So I'm planning to just give you a brief overview of of the GLOBAL SMALLER COMPANIES TRUST and how it's managed, why the opportunity is so compelling today in smaller companies. We'll talk about performance. We'll talk about how the trust is is positioned from a job... Geographical and sector standpoint.

1:23 We'll touch a little bit about the market environment and, of course, what we've been doing on the portfolio from a stock perspective. So let's start with an overview of the of the trust.

1:40 So the GLOBAL SMALLER COMPANIES TRUST has about 200 and... Sorry, £726,000,000 in in management. And the investment philosophy is very simple. We take a long term conservative approach to buying good quality growing businesses, but we do this in an opportunistic way. We're looking to buy into these higher quality smaller companies when they are out of favor and they are available at a significant discount to what we think they are intrinsically worth. So I would say that the differentiators of this trust versus other global small cap funds are... Really starts with the people. So it is a very well resourced trust. There are nine people involved with the management of the assets of this trust.

2:28 They have twenty years experience on average. They have spent most of their careers actually looking at smaller companies. So they do know the businesses really well, and they know the management teams really well and what is likely to succeed and fail, within this particular investment universe. The philosophy is different from the perspective we are truly long term investors. So we have actually invested in in some companies within this trust for over fifteen years. So we've really seen these these businesses that started very small grow up and become much bigger much bigger companies. So we're very long term investors, and we do approach the smaller company investing aspect from a different angle from the perspective of we know that smaller companies do outperform over the longer term. They are starting from a lower base.

3:21 They tend to not be very well known by the investment community. And as they, do, become bigger, they do rerate in terms of valuation or the valuation does expand. The issue with small caps is it is a riskier asset class. So what we try and do is we try and lower the risk for our clients. So we're trying to offer the faster growth that is inherent within smaller companies but with lower levels of risk. And the way that we lower risk for our for our for our clients is that we focus on better quality companies that are able to withstand all the issues that small caps typically face, and we buy these companies when there is a discount to what they're worth. So if we're wrong in our analysis, the discount does protect us on the downside.

4:08 So this this trust is unique from the perspective of it is giving you coverage to small companies all over the world. So it's not only the the developed markets, it's also the faster growing emerging markets as well. We have invested in over 40 countries across the world, and we think that does make us unique. It is truly small cap. It's not mid cap. We can invest in the in the very small companies within the quoted markets, and that's a function of of the size of this trust. We're really proud to have grown our dividend for fifty four years consecutively. That's a record that we think is very unique, and it's a function of the cash flowing nature of the businesses that we buy into.

4:55 So why is the opportunity so compelling today within small caps? So if we think about recent performance, it's really been dominated by the large caps. It's been a very momentum led market. We have seen this in the past. We don't think that this is structural. We think this is cyclical. Normally, in the past, when you've had a period of dominance of large caps that... And large caps have reached really high valuations, you've seen small caps come back into favor, and there's been a really strong and sustained recovery in the asset class. We don't think that that concept of mean reversion is dead. We think that this is a cyclical downturn that we're in and that small caps will come back. Indeed, if you look at the relative valuations of smaller companies today relative to larger companies, they are at historically attractive levels.

5:48 They are at the levels that have marked the start of a new small cap cycle. So that's something that we're really excited by. We think that there are some catalysts that might be helpful for smaller companies to come back into favor. I think two of them are shorter term, and one of them is more longer term. So the two shorter term ones. So smaller companies, generally, they do outperform coming out of a growth slowdown or or a recession. And if we think about the current economic environment, I think a lot of people are concerned that the economy might slow down towards the end of the year because of the tariffs that have been implemented and the effect that that has on consumer incomes, real incomes, and how the policy uncertainty affects investment generally across the world.

6:41 So the interesting thing to note is that smaller companies generally do underperform going into a growth slowdown. That that is the normal way that these... The slowdowns proceed. During the slowdown itself, because they've already underperformed, smaller companies are actually quite resilient relative to larger companies during the growth slowdown. And then on the way out, as growth accelerates, smaller companies are the best place to be. They really do outperform by a very wide margin relative to larger companies. So we think that the pain... A lot of the pain is behind smaller companies in anticipation of a slowdown in growth. And as growth picks up, smaller companies should revive. Interest rate cuts are always helpful for smaller companies. Many of them are on floating rate debt. They are very sensitive to financial conditions.

7:32 We have had the start of an interest rate cutting cycle. As we get more cuts come through, that's going to be helpful as well. And finally, this is a more longer term trend that we think is underway. We do think that the investment environment has changed from recent years from the perspective of we've been in an environment of very low inflation. And some of the factors that have been helpful for inflation staying low, some of them are reversing. So if we think about globalization, that is now becoming deglobalization. We have started to see... Or we saw the start of a commodity cycle really in 2020. We've seen a lot of political change, and some of the new political parties that have come in have been more insular and more populist, and they are spending more money on fiscal programs and infrastructure.

8:28 And because they are more insular, that is leading to conflict as well, which is leading to increased defense spending. So all of these factors generally have been inflationary over over time if you look at history. And what's interesting about that is that smaller companies actually do quite well in in times of higher inflation, such as the nineteen thirties and and and the nineteen seventies, the early nineteen seventies. And part of the reason why that is is because they have more of exposure to the sectors that do well in inflation, such as energy, materials, and industrials. So we think that the asset class is well placed for this new investment environment. So this trust is a pure play on small caps. It is well positioned to benefit from a recovery in in the global small companies asset class.

9:20 So these are the people behind this trust. There are nine of us. It's a very experienced team that... With over twenty years experience per person on average, and we are also backed up by central research teams as well. We do split by region. So the left hand column is North America, and the second column is The UK. The third column is Europe. Fourth column is Japan. The rest of the world or the emerging markets is managed by third party funds. In The US, we do have 27 research analysts, and we have 15 research analysts in Europe helping us to pick stocks. So this is what we look for in in an investment, and this is what we mean by high quality companies when they are undervalued or sort of quality value.

10:09 So the first thing that we look for in a business is that we have to be able to understand the business fully. So we have to know what the business might look like in ten years' time with a reasonable degree of confidence, know where the risks are likely to come from, and how to value the company. And believe it or not, that does actually rule out a large chunk of our investment universe because many companies within small caps, they tend to be loss making or they tend to be very risky because they're, for example, a very early stage product that isn't making any revenue yet or earnings. And in the case of, for example, biotechs, it might be a a single drug, and the drug may work or not. And we just don't have an edge in that space. So we typically don't invest in those riskier business models. We invest in established companies.

10:59 The companies have competitive advantages. They're either the low cost producer or a differentiate... Offer a differentiated product or service, and we think that those advantages are sustainable. They operate in industries that have barriers to entry, and they are diversified by customer and product. We like businesses with pricing power that have financial strength and generate lots of cash flow. When it comes to management teams, we want to really partner with management teams that have skin in the game or that own a lot of of the company themselves so that our interests are aligned. They must take care of day to day operations without... With very few surprises, and they must have a strong record of of capital allocation.

11:48 The issue is that these high quality businesses with really good management teams, they tend to be well known by the market. But the beauty of small caps is that because the asset class is somewhat illiquid and it is volatile, you do get good opportunities to buy into these companies at attractive valuations when the shares are out of favor. And we are opportunistic. We look for those types of of situations where a good business is out of the favor and available at a at a at a discount. We will use a whole host of different metrics to value a business, multiples of earnings, cash flows, book value, discounted cash flows, or private market valuations are all used by the team to to value companies.

12:35 So we do... What we do does show up in the numbers. So if you look on a median basis at the portfolio versus the benchmark, we do have better quality metrics. So for example, our gross margin, operating margin, return on equity are all higher than the benchmark. The net debt to EBITDA or the leverage in the business is lower, and we're offering this to our clients at a lower multiple of sales and earnings and a higher dividend yield. So I'd like to talk about performance over the last twelve months and also over the longer term. It has been a difficult backdrop for active managers. It's been a momentum led market. Quality and value as a style has lagged.

13:23 In fact, value lagged growth by about 2% last year. For us, we are behind the benchmark over the last twelve months. We did have a difficult period in our UK portfolio, and it was particularly affected by our exposure to AIM related companies where we had over 20% of our UK portfolio in AIM stocks, and they were severely pressured by investors selling AIM related companies ahead of the budget last year in The UK because there was concern that the chancellor would remove the exemption for inheritance tax on on AIM related companies. We do... Historically, we have liked AIM companies because it is an underfollowed part of the market, and you can find some really good businesses in there at attractive valuations.

14:17 We... The other issue that faced The UK portfolio was The UK market in general has been in outflow. 46 out of the last forty seven months have seen outflows from The UK market. Active UK managers tend to own similar stocks. So outflows from peers or or just the industry overall is affecting everybody, and and that has been a challenge. We have had some stock specific issues as well in in in The UK portfolio. But to counter all this, we have taken some actions. So we've reduced our AIM holdings down to 15%. We have gone through all of our AIM holdings, and we've made sure that they don't have exposure to IHT funds, which have been selling, and they have a strategy to move their listing to the main market. So we've taken some action on The UK portfolio.

15:13 In the European portfolio, that had a difficult year as well because of its exposure to China, where companies such as ASM International and TICAN were affected by a slowdown in China and various trade related controls. And the European portfolio also didn't have enough defense companies in their post Germany's decision to increase its fiscal fiscal spending. So, again, we've taken some action in the European portfolio where we have increased our exposure to defense and and infrastructure at attractive valuations. Pleasingly, the Japan portfolio has done really well over the last twelve months. The rest of the world has also done really well. We have taken what we think are improvements, or we've made some improvements in the trust over the last twelve months that we think can be helpful for future performance.

16:08 So for example, we have cut down the number of holdings within the trust from 213 to a 196. We've tightened up our cell discipline. We have increased our usage of central research analysts through the group, and we've completely internalized our exposure to Japan. Previously, we used part of part of this... The Japanese portfolio was run by third party funds. We brought that in house because it lowers costs for our clients, and it gives them exposure to a very experienced Japanese equities team with a good track record. So pleasingly, it looks like the changes that we have made within the trust more broadly are starting to show through in in the results.

16:55 The last five months have been a lot better than the first seven months. So it looks like some of the changes are are starting to have an impact. And versus the peer group, we are ahead of all of our global smaller companies, AIC peer group over five years. So that's a record that that that we are proud of. This is very much a long term strategy, and I think investors should focus on the longer term performance. And if you look at our longer term performance, the GLOBAL SMALLER COMPANIES TRUST is up sevenfold over the last twenty five years, which is ahead of the all country world small cap index, which is up sixfold. The Numis Index, which is UK smaller companies, up just over fivefold. The MSCI World, which is up 461%, and the FTSE SAD is only delivered 218% last twenty five years. So so we have outperformed the FTSE as well. So so long term performance is is strong.

17:56 So let's talk about where we are invested today and how this has changed. So asset allocation is very much a function of bottom up stock selection. We are in constant communication with our team and trying to identify where there are needs for cash because of good ideas, and we generally tend to divert cash from areas of of of the world where there is more to sell than to buy towards areas of the world where where there are more investment opportunities. It is a truly global product, emerging markets and developed markets, 40 different countries. We're not like other funds in... From the perspective. We don't have a heavy weighting in technology. We haven't put all of our clients' money in one sector.

18:45 We are actually very diversified, and, actually, we are seeing a lot of opportunities in industrials. Just under 30% of this trust is in industrials. That has grown over the years because the outlook for industrials is very favorable because of increased spending on defense by governments, spending on infrastructure, the attempts to reshor or or near shore by various developed markets, automation, energy efficiency. These are all longer term trends that we think are favorable for the industrial sector. And the industrial sector has been in the doldrums over the last two to three years. PMIs and ISM readings across the world have been very low because of destocking and various challenges that the industrial sector has faced.

19:36 The other area where we have grown our exposure is in consumer discretionary, especially in The UK where we found good opportunities in the housing related area. In real estate, that exposure has increased from last year to this year. We found good opportunities in property services companies such as Savills and Jones Lang LaSalle. The issue that these companies faced was that transaction volumes have been very low in property in general because of higher interest rates, but we think that as interest rates come down over time, that transaction volumes will pick up and those companies should see a recovery in earnings. We've taken some money off the table in in basic materials, which has done really well, and we've we've we've taken some profits there.

20:25 From a sector perspective... Sorry. From a geo... Geographic perspective, we are overweight Japan. So we're overweight by 2.1%. We're seeing really good value in the Japanese market. There are... There is a program by the Japanese government to increase return on equity at Japanese businesses. Many of them are buying back their own shares because they're on... They are trading below book value. Many of them are selling noncore assets or selling some of their cross holdings in other businesses and returning cash to shareholders. And our team have found some very good or idiosyncratic opportunities that are undervalued in the Japanese market, and and that has been helpful for performance. So we are overweight Japan because there are... There is still a lot of runway in in these types of opportunities.

21:18 In Europe, what a difference a year makes. The the European market was very out of favor twelve months ago. There was a lot of concern about growth. The the valuations were very low, but now the growth prospects seem a bit better because of fiscal spending on on defense and infrastructure that has been started by the German government, and that trend could broaden out to to other government... Governments within Europe. So the growth prospects for Europe have improved, and the valuations are still reasonable in parts of Europe. In The UK, we have just under 20% of this trust in The UK because of our hybrid benchmark. So we do have a benchmark where we are 80% MSCI all country wild small cap and 20% numerous UK smaller companies.

22:11 So we are slightly underweight our benchmark, but we still have 19.6% in The UK where we are seeing some really good opportunities because of all the outflows that The UK market has faced. Many businesses in The UK market are trading on very low valuations, so we are well represented there. The rest of the world is is just under 15%. And here, we have exposure to a whole host of different countries. We have good exposure to Vietnam, Philippines, Indonesia, Eastern Europe, Latin America. Many... Our fund managers are telling us that India was an expensive market, but the valuations have become a bit more reasonable.

22:56 And there are some concerns about China and Taiwan because of tariffs and a potential growth slowdown there, so they are slightly underweight in China. In North America, there aren't so many opportunities. The valuations do look quite high. There is potential risk of stagflation in North America. That is a slowdown in economic growth towards the end of the year and a potential pickup in inflation towards, you know, towards the end of the summer is is when that is expected to manifest. So we are a bit more cautious in in in North America.

23:36 So I'd like to talk a bit about the market environment and the things that we are seeing in the market and why we think the portfolio is well positioned for for the current environment. So as I mentioned, there could be a slowdown in economic growth because as inflation picks up, real incomes for consumers declines, and uncertainty leads to a decline in investment. So we are watching that. We've always been careful, about predictability of earnings, and we've always favored businesses that do have highly predictable earnings. We think that is even more important in today's environment than it has been in the past. Strong balance sheets are a necessity if growth does slow down, so that's something we're placing even more emphasis on today than we have been in the past.

24:26 A lot of businesses are operating on... With very high operating profit margins. And if we look at history, profit margins are a mean reverting series, I. E. They they did go in cycles. And at the moment, they are looking quite elevated. So we are being careful because if inflation is picking up, then you would naturally think that costs would rise and that could be dampening for for for profit margins. So we're avoiding cyclical businesses that are operating at or pricing in peak margins because they could be seeing a deterioration in in in those margins. The valuations I've talked a little bit about. So North America does look expensive. Everywhere else does look more reasonable, and that is...

25:15 That shows up or from a bottom up perspective in our underweight position in North America and overweight in other parts of the world. There is a lot of geopolitical uncertainty. We've seen political change. We've seen the potential potential implementation of tariffs. We've seen conflicts in The Ukraine in... Between Gaza and and and Israel and and now Iran as well. So there's a lot to worry about from that perspective. And those things could be inflationary, particularly if energy supplies are are cut off. So we are focusing on businesses that sell essential products and that have pricing power. We've always liked pricing power within our businesses. That is becoming even more important today.

26:01 It is also important to invest in businesses that have low capital expenditure needs because a lot of the time, many businesses will invest in plant and equipment that is very... And and that plant and equipment lasts a very long time. And when it becomes due for replacement, the cost of that plant or equipment does rise in price over time. And we don't want to be in an instance where our businesses are spending a lot of their cash on on new plant and equipment that is just becoming more and more expensive day day by day. So that's something we're careful of. And we know that with the policy uncertainty, there will be market volatility. It's been really volatile this year already. And in that type of an environment, you do want to own quality businesses.

26:46 You want to remain long term, and we are long term investors having invested in companies for over fifteen years, and you need to be selective and focused on capital preservation. Capital preservation is one of the hallmarks of this trust. We do like to participate in the growth of of of of these small cap businesses, but to also protect the downside. So that is something that is inherent in the way that we manage money. So I'd like to talk a bit about individual stocks and what we've been doing on the portfolio just to give you an idea of the types of businesses that we've been finding and and the opportunities that are out there in the marketplace. So SSP Group is a UK business.

27:34 It is one of the leading operators of concessions or food and drink concessions in airports and railway stations. The company had a really good track record up till the COVID period when COVID was particularly detrimental to the company because airports were were not full of passengers, and not many people were traveling by train. So business slowed down significantly. And recently, the shares have been out of favor because they've been spending a lot of money for new contracts, and they've also seen a slowdown in Europe as well. We think this business is still a really high quality business. And part of the reason why that is is because of scale advantages.

28:21 So they have invested heavily in technology. They have an offering that is superior to their their peers, and a lot of the airport operators and and railway station owners like to partner with a company such as SSP because they actually derive parts of their revenues on on how well SSP is doing within their particular venues. So they they are on percentage of revenue type models. So they're always gonna partner with someone who knows the markets that they operate in very well, know... Knows what travelers want to eat and drink when they go to the airport or the railway station, and can handle all the complicated logistics. Airports are very complicated from the perspective of security, and you need to be able to execute extremely well within that type of an environment, and SSP has a very strong track record in that regard.

29:15 The shares were out of favor. They were available at eight times EBITDA. We think the business has a really strong growth trajectory because travel is growing in the emerging markets where SSP has a good presence. More of the middle class in emerging markets want to get on airplanes and travel the rest of the world, and and that is helpful for business. And in North America, North American airports are very underinvested, and they are upgrading, their food and drink facilities within within, North America, and SSP is winning a lot of those contracts. So growth outlook is really favorable. The shares were available at eight times EBITDA. We think that they should be worth at least 10 times. So that gave us a really good opportunity to buy into a high quality company.

30:03 CACI International is a US business, and it it actually provides government... To the government, US government, it provides IT services. And earlier this year, the entire sector was out of favor because the US government was looking to cut costs in federal spending. The so called Department of Government Expenditures, which was headed up by Elon Musk was looking to cut $2,000,000,000,000 of spending. And that created a cloud over the whole sector. Many of the companies fell to very low valuations. We actually met the management team twice earlier this year, and we talked about the impact of of the DOGE program on on CACI. And what we learned was that only 6% of their revenues are likely to be affected by cuts to government expenditures.

30:56 So that that seemed really low to us. And not only that, the new administration was actually helpful for their growth trajectory because CACI has a very good exposure to defense, particularly in areas such as cyber warfare, where where the the the the budget is actually growing for that part of of of the defense program. So CACI was well positioned from that perspective, and they also had a large presence in the Department of Homeland Security as well. And as we know, The US is looking to tighten up on immigration, and the Department of Homeland Security's funding is increasing. So the shares we thought were unjustifiably sold off. They were available at 12 times earnings, and we thought that they should be worth 18 times earnings given the growth profile of the business and the quality of the business.

31:50 So we took that opportunity, and and we bought a position in in CAC International. Another business that we have purchased a position in is CCC Intelligent Solutions. This company is one of those coveted software businesses that is the so called rule of 50 software business. So in the software industry, if you have revenue growth over 10% a year and you make a margin over 40%, you are highly coveted by investors and and by other companies. This is... Those businesses are very rare, and they're able to grow their intrinsic values reliably over a long period of time. CCC Intelligent Solutions operates within the ecosystem of the auto insurance industry, And they provide auto insurers with their software that run their run their entire claims management business.

32:49 They also provide software to auto repair shops as well. So they're involved in that in that wider ecosystem. So if you're unfortunate to have a car accident in in... And you need to call your insurer up, they will log a claim with CCC software. CCC software will then put out the claim to various auto repair shops. It will also contact the the haulage company, and it will contact the parts distributor and arrange the entire claim from logging of the claim all the way to through to settlement. So there are really strong network effects in this business. The more insurers that you attract onto this platform, the more auto repair shops you attract and vice versa. So it's a virtuous cycle.

33:40 The shares were out of favor because auto insurance claims have declined in The US. A lot of customers are finding the new auto insurance rates quite high, so they are not claiming for all of their accidents. But we think that that auto insurance pricing cycle

33:59 should turn downwards, and that should lead to a revival in auto insurance claims. So we thought the sell off was was unjustified and the shares were available at a very attractive valuation. And then I'd like to touch on the cyclical businesses because not only do we buy these compounders, these long term growth businesses that are available at attractive valuations, we also buy cyclical companies that we tend to hold for a shorter period of time. These are high quality companies. They're just operating in an industry that is currently depressed from a profitability and valuation standpoint.

34:34 So if we cast our minds back to five years ago, we were in the midst of the pandemic. A lot of people wanted to move house because they they needed more space. So they took out mortgages. Many of them took out mortgages on five year deals, and many of those five year deals are up for renewal this year. So we've started a position in Mortgage Advice Bureau, which is one of The UK's largest mortgage adviser networks. On the premise, the the shares were very out of favor because transaction volumes have been very low because mortgage rates in The UK have been quite high recently. But as those refinances come to market, we should see transaction volumes on the mortgage side pick up, and the UK government has actually loosened its rules on mortgage lending as well, particularly for first time buyers, which should also be helpful for a recovery in earnings.

35:32 And then finally, on the long cycle side, so just to explain what a long cycle opportunity is, we do invest in industry... Companies in industries with long capital cycles. So these are industries where the incumbent companies spend a lot of money on new assets. They all then all realize that they've spent too much money and there's overcapacity, then there's a long period of underinvestment. So the classic long cycle industry is commodities.

36:01 So for example, the oil industry spent a lot of money up till 2014 on on new production and new assets. They then realized that they have overproduced, and that led to a decline in the oil price. And ever since then, there has been a period of consolidation. Many companies within the oil industry have merged with each other, and they are returning cash to shareholders rather than drilling for new assets.

36:28 So GTT is a new business in portfolio. This is a French business. They are actually involved with LNG, which is liquefied natural gas. They provide the membranes that go into liquefied natural gas containers and vessels or the ships that transport LNG across the world. The customers for GTT generally don't tend to compromise on quality because if the membrane leaks, if there is any kind of leakage at all, that is potentially an environmental issue, and it could create a a large liability for the company. So there is not a lot of compromise on quality, and GTT has by far the best technology.

37:14 It has the 90% market share in its industry, and it has a very unique model in the way that it goes to market. It act... It it goes through a licensing model to to its customers. And because it's a licensing model, they make 6060% operating margins. And this company is not very well followed. It's not all that liquid. And because it is underfollowed, we were able to buy the company at a 13 and a half times earnings multiple. For a 60% operating margin business, we thought that was a very good opportunity.

37:50 I'll talk a bit about what we've been selling on on on the portfolio. So we generally sell if we have issues with the business quality or management team. So we did have an issue with the management team at OSB,

38:05 So we decided to switch with... To Paragon, which is a similar business in The UK market. This is a specialty lender with a a primary focus on buy to let mortgages. The management team, they did overpromise and underdeliver, if you like, and they have missed on guidance a number of times, and they haven't taken accountability of that. So so we have questioned whether that they are the right people to partner with. So we've we've switched out of OSB Group. In the investment thesis broken bucket, so Remy Cointreau is another business that we've sold because of our concerns about growth in China. The the the brandy market has been curtailed or the opportunity in the brandy market has been curtailed because of China's restrictions on imports of of of brandy, and that has somewhat damaged the case for for Remy Cointreau.

39:02 So we've sold our position there. There were lots of instances where shares reached a full valuation or we found a better company to switch into, and those are labeled in the bottom left hand corner. And then finally, we did have a lot of takeover bids last year, and we had seven takeover bids in total. Six of them were in The UK, and that is just highlighting how much opportunity there is from a valuation standpoint in The UK. We owned Essential FD Technologies, DELLATA, lounges, timing, and equals. All of them were bought in the last twelve months. And then in May... So in May and June so far, we've had a takeover bid for Alpha Wave in The UK. There's been a takeover for Skechers in The US, and GLOBALDATA was also the subject of takeover interest from KKR and ICG, but I think that is...

39:58 Has now called off. But we're waiting to see how that develops. So it's been a good year for takeovers. So those were sort of the areas that I wanted to touch on. I'd be more than happy to take some questions from you. So, Peter, if you'd like to organize the questions, and and and we can get to those. Yes. I will. Thank you, Nish, very much for the insight, welcome everyone to the q and a part of the presentation. If you'd like to put some questions into the chat, please do so. I'll try and get to as many as I can. If we run out of time, I think we've got about ten, fifteen minutes. We'll look to answer them post the event and put them onto the IMC website. But the first one, we we have lots of questions already submitted. We had two submitted pre events, and they have been answered, and you'll find them on the website.

40:52 We'll go to the questions submitted live. Very quick one. Yes. You have mentioned this, but one... The first question coming, and I might as well present it now, is is your portfolio tilted more towards growth or value, or do you regard as balanced between these styles?

41:07 Yeah. I'd say it's slightly more value than growth. There is a... There is some balance to it from the perspective of... And and that's more of an evolution in the way that we buy businesses. So when we buy into a company, we can't fully be sure that the business is of the quality that we think it is. You only really learn about a company once you've owned it for a few years because there's always gonna be surprises and knowing how the management team handle the surprises and how resilient the business is and and how it performs through various economic conditions gives you more insight as as you own own the company over a period of time. So when we buy into a company, we want to buy at a discount to protect us on the downside because there is some uncertainty.

41:52 But then as the conviction grows, the the valuation kind of heads towards intrinsic value. And if the business is still high quality and it still has runway for growth, we will still hold it. We we do hold fairly valued companies that still have very good growth prospects. So there is that angle of we're starting out as value, but then it kind of morphs towards growth. So there's some balance between the portfolio where there are companies within there that we have initiated more recently that are at discounts, that are more in the value camp, but the ones that are kind of older in the portfolio and more well known to us over time, they tend to morph towards the growth year end of the spectrum. Okay. We have a lot of questions on Asia and mostly from Steven, who must be very keen on Asia.

42:44 I will point out there is a Asian smaller companies trust out there run by Aberdeen, but a lot of these themes are gonna be on the collectives and the rest of the world part of the portfolio. But the first question is slightly more about the benchmark. I think long term shareholders will remember that we changed the benchmark or the board changed the benchmark to reduce The UK exposure a little bit down to 20%. But the question is why not go truly global?

43:07 I'm not sure I agree with that comment, but then get rid of the 20% bias to UK. It is quite high compared to index... Global index portfolios. Can you just mention a bit about why you think The UK and 20% is appropriate?

43:24 So let let me start at the beginning from the perspective of why we have a hybrid benchmark. So we think the Numis Index is a better representative of The UK smaller companies market. So that's why we've gone down the road of having a a hybrid benchmark because we wanted our UK portfolio to be represented fairly and and and accurately. And we've... We're fully cognizant that The UK market has been in a period of deequitization. So there's been a lot of takeouts, and there haven't been a lot of IPOs. So The UK has shrunk as a percentage of the global markets over time. And we were 40% actually of of... In in the hybrid calculation in... Tilted towards The UK when The UK was a bigger part of the world market, and that came down to 30, and it came down to 20.

44:17 And we review this every year, so we will have another review of this situation in February. We do think that the market is undervalued, so that's why we do have a high percentage weighting in in absolute terms in in The UK market, and that's that's justified with the number of takeovers we've had in The UK market. And those six companies in The UK market that were bought out, there was

44:42 there was a premium offered on all of those businesses. So we think the market is very undervalued, and and we think there are good opportunities there. That's why we've got 20%. But we fully understand your point, and we review it every year. And next year, we'll have another discussion on whether we need to actually bring this down further or even go to an all country wild index.

45:05 And on the collectives, a comment made is that... And I can't agree or disagree with this because I haven't got the stats in front of me. But the question is both UTLICO and Pinebridge Asia ex Japan have been very poor performance... Performers. Are you changing these funds? I I think, generally, how how do you look at the collectives and and decisions go into who manages that aspect of the portfolio could be interesting. Okay. So let me start with premise that why we have collectives and to represent the emerging markets. So the emerging markets is a very specialist area.

45:38 We don't have the capability in house. We don't have an emerging market small cap team. And you do need specialists to manage this part of the world because you need to understand the local conventions within the emerging markets, the accounting, have access to the management teams, and to actually have boots on the ground there in terms of geographical presence. And we don't have that. So that's why we're not going to do something where we don't have expertise. We have identified funds that we think are similar in terms of the way that they manage money to the rest of the trust, and we have a lot of input from our multi manager team. Our multi manager team are professional pickers of funds, and they have a lot of input into the funds that go into this trust.

46:27 Now on UTLICO, the long term track record is strong,

46:32 But more recently, they have had an issue because they had an unquoted investment that was written down that did affect performance in in the last twelve months. So that has been a headwind for them. We do think that their exposure to Latin America in particular and to infrastructure assets that have a really attractive quality in the sense that they are infrastructure assets, so they are contracted. A lot of the revenues are contracted, and they have inflation escalators in the contracts. That's an attractive proposition because it provides stability. But not only that, there's also growth as well. So you're investing in a high quality company with contracted revenues, protection from inflation, and unique assets where they are very difficult to build, where you need a lot of permitting, but at the same time, these are growing assets as well. They are growing their cash flows year after year. So So that's why we like Utilico.

47:33 On Pinebridge, yes, we're fully aware that they have had a period of underperformance. That fund is under review. All our funds are under review. I will say that that fund is under more scrutiny than the other funds, and we are regularly meeting their management team for updates and what they're going to do to turn performance around. One of the major issues that they've had is asset allocation. So they haven't been exposed to India in the same way that other funds have been exposed, and India has been a really hot market. They have been more exposed to China because they've seen more valuation opportunities in China given the stock market decline there. So that has been particularly helpful for them. Thanks. We'll leave collectives there. We will get to answer all the questions post event, but there's been quite a few.

48:23 There's no need to cover a lot of that now. Moving quickly on, we have a question here about IPO market. And, in The UK, it's been quite a stagnant market recently.

48:35 We hear a lot of smaller companies are pausing IPO expectations and staying private for longer. Do you think the trust may have been affected by this trend? And a, is there a broad universe of investable listed companies available to you? And b, would you ever think about or the board think about expanding the mandate into private companies given this trend of staying staying private for longer?

48:57 Yeah. And I think that is a fair point because the costs of being public are quite high. And I think a lot of management teams are frustrated, of course, with with share price volatility and potential undervaluation. So that that is a very fair point, and it does affect us from the perspective of... Especially in The UK market because the I p... You do need a vibrant IPO market for new opportunities. And there haven't been a lot of new opportunities coming in, and at the top of the funnel, there there have been some take... Takeovers as well. So the opportunity set has shrunk. There... It is still quite a large market. There are still more than enough con... Companies to choose from, So we don't have that problem. It's not a highly concentrated small cap market.

49:44 So we still think there's more than enough to go around. We're hopeful that the the government will take some action at some point to try and revive The UK market more broadly. And and if that comes all the way down to the small cap market and the AIM market, then then that will be helpful. But there's been a lot of talk, not a lot of action yet, but that... That's something we're monitoring.

50:10 Moving on to gearing. Can you talk about gearing? How has this changed over time, and how might it be changing in the future? How is it funded? And I'll merge it with a couple other questions. Basically, I think it's about 6% now considering the opportunities in small cap. The question is is that on the on the low side? Yeah. So the gearing that was taken out

50:37 has been funded by very long term low cost debt. So we took out 2.39% debt in 2019 that is termed out to 2039, and that provides the bedrock of our borrowing. And we've taken the view that we should be levered about 5% through the cycle because smaller companies generally rise over time, and we want to participate in in in that in that growth over time with with some structural leverage. So so that that is one part of the gearing. The second part of the gearing is the opportunity and the willingness to take tactical gearing. So we are willing to take some tactical gearing, but we are very selective on the type of environment that we would take tactical gearing in.

51:31 So from a bottom up perspective, we would have to see a lot of opportunities that fit our investment criteria, both from a quality of company standpoint and a valuation standpoint.

51:42 So from bottom up, we need... I need to be having a lot of calls and emails from the various teams saying I need money because I'm finding a lot of ideas. And then that that that is a good indication that we need to deploy some cash and potentially take some gearing. And then from the macro perspective, you normally get those types of environments when sentiment is very depressed, when valuations are very low, when liquidity is tight but potentially loosening.

52:12 Those are the types of in... That is a type of environment when we would be willing to take some tactical gearing. We have to be very selective on when we do this because we probably will only have, you know, one or two bites at the apple in terms of of of taking on leverage to to to to buy new opportunities. And you have to be selective because leverage cuts both ways. Yes. You do benefit on the upside, but you also have a potential issue on the downside as well if it goes wrong. So it's a very careful and considered approach to taking tactical period. Thank you. Moving to, buybacks. The double digit discount has been fairly persistent despite the potential catalysts and buybacks. Is there something we just have to live with until performance picks up, or do you think the board remains concerned about getting the discount into 5%, which I think is the long term target?

53:10 And there's been a few questions on that, but that's basically the summary of all of them. Okay. Yes. We've been very frustrated with the discount, and it's it's not been us only. It's been the wider investment trust group as a whole. We were actually on a 17% discount at one point last year. And the board the board strategy to to bring the discount in,

53:34 well, we've been ramping up the buyback. So we were buying back about 5% of the company on an annualized basis. We've increased that to 10% of the company. We've we've looked at, you know, the effectiveness of the buyback. So that's been one part of the strategy. We have increased our efforts on marketing. So it's been a much busier year on marketing to try and attract new buyers, regular new buyers of the shares. There's been a program on on PR as well and just raising awareness of the trust. So all of these things are going on in the background, and we are constantly reviewing how we can do more. And then performance, yes, we've we've also taken steps as well on the performance side to improve performance. It looks like some of that is now starting to come through in in in the numbers.

54:32 Thank you. And I think we'll finish with one question on activism. And I thank you all for your questions. But we'll finish here, and we'll answer them post event if haven't got to them already. But, hi, Nish. What is your position on activism? When you buy a company, do you tend to engage actively with the board and management,

54:51 I I e suggest improvements, or take a more passive approach and allow your investment thesis to play out? Yeah. So so we are not activist investors, but but we do manage... We do meet the management team very regularly, and we do take the issues of voting, proxy voting very seriously, and that is done through our responsible investment team. And there are some very formal guidelines on that. So we are talking to our management teams very regularly. As a team, we see over a thousand companies a year, that between the nine of us. And some of those company meetings are with our existing holdings.

55:31 So we're on top of them on a very regular basis, but we're not formal activists. We don't look to take board seats and to enact change or or force change through. That's that's not what we do.

55:46 Lovely. Thank you, Nish. If you... If I can just ask you for some closing comments, and then we'll hand back to Jake to finish off. Yeah. Well, first of all, I'd like to thank you for your interest and and your support. We do think that this is an opportune time to look at the the smaller companies universe as a whole, and this is a pure play one stop shop for exposure to smaller companies.

56:11 We do manage the portfolio in a really conservative long term way looking at good quality companies that are undervalued. We've got a very well resourced team. The performance, we've been working on that. The longer term performance is strong, and performance versus the peer group is good. And we're we're actively trying to manage the discount as well, and we've been raising our dividend regularly. We've actually raised our dividend for fifty four years consecutively, so that's that's a record we're we're proud of. So I look forward to interacting with more of you in the future, and I wish you a very good day. Perfect. Nish, if I may just jump back in there. Thank you very much indeed for updating investors this morning. I please ask investors not to close this session as you'll now be automatically redirected for the opportunity to provide your feedback in order that the management team can really better understand your views and expectations.

57:02 This will only take a few moments to complete, but I'm sure it'll be greatly valued by the company. On behalf of management team of the GLOBAL SMALLER COMPANIES TRUST PLC, we would like to thank you for attending today's presentation. That now concludes today's session. So good morning to you all.