Exposure to domestically oriented US growth businesses: Brown Advisory US Smaller Companies

Exposure to domestically oriented US growth businesses: Brown Advisory US Smaller Companies – by Alan Ray

Overview

Brown Advisory US Smaller Companies (BASC) targets capital growth through a diversified portfolio of c. 80 mid- and small-cap stocks. BASC’s management team, led by Chris Berrier and George Sakellaris, take a quality growth approach, focusing on companies with long-term compounding characteristics. As a result, turnover is low, with many portfolio companies having been owned since Brown Advisory’s tenure as manager began in 2021.

Chris and George believe that US smaller companies are fundamentally undervalued compared to large caps. They point out that a large proportion are owned through passive strategies, even though small caps are typically under-researched and particularly suited to active management. While the market has recently been focusing attention on the US’s international trade policy, important accounting and tax changes in the US could help bring forward growth and investment plans for many businesses. Many of BASC’s largest holdings, such as Waste Connections, Bright Horizons and HealthEquity, are domestic businesses with little direct connection to trade tariffs but which could benefit from these changes.

Under Brown Advisory’s tenure starting in 2021, BASC’s NAV TR of -3.5% compares to the benchmark Russell 2000’s total return of 7.0%, with underweights to financials and low exposure to high growth pre-profitable companies some of the main contributors. In 2025 the board introduced a conditional tender offer, which will give shareholders the chance to realise some or all of their holding if BASC underperforms its benchmark in the five years to 30/06/2028. The board also agreed a reduction in management fees, which we expand on in the Charges section.

BASC’s discount stands at around 8%, having traded out to mid-teens for a period in 2023 and 2024. Share buybacks have been utilised in the last year in response to the discount, and there is also a three-yearly continuation vote, next scheduled for 2026. BASC primarily targets capital growth and does not pay a dividend.

Analyst’s View

It’s fair to say that while there have been some wild swings in investor sentiment to US equities this year, not much attention has been focused on smaller companies. Consequently, the valuation gap between large and small is, in the BASC team’s view, as wide as it has ever been. At time of writing US inflation has come in lower than expected, raising the prospect of further rate cuts and these are, traditionally, the precursor to better performance from smaller companies, with their greater correlation to the domestic US economy.

Those wild swings have been accompanied by a live debate on US exceptionalism, and global flows do show that investors have spent the first half of 2025 allocating capital elsewhere. How much of that turns out to be short-term tactics rather than long-term strategy remains to be seen, but in our view the US remains the pre-eminent global equity market, and it won’t take much for the investment management industry’s risk models to start flashing warning indicators on being ‘underweight’ the US. More practically, the US has made several pro-business changes to tax and accounting rules, and loosened regulations on banks, all of which could help drive more corporate investment. These changes may have flown under the radar by comparison to some of the higher profile negotiations between the White House and the rest of the world, but they are substantive, and combined with moderating inflation and falling interest rates, could be the set up for a recovery in US smaller companies.

Bull

• US smaller companies offer direct exposure to the world’s largest economy
• Economic data is signalling more positive messages about inflation and interest rates
• Pro-business changes in the US could be very positive for small caps

Bear

• Investor sentiment to US smaller companies is weak
• BASC’s portfolio has low exposure to high-growth pre-profitable companies currently favoured by investors
• Passive investment strategies may distort the performance of small caps

See the full research on BASC here >
 

 

Disclaimer

 
This is a non-independent marketing communication commissioned by Brown Advisory. The report has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is not subject to any prohibition on the dealing ahead of the dissemination of investment research.