Overstone UCITS Global Smaller Companies Fund
Capture the small cap premium through a classic value based approach.
Investment objective
The objective of the Fund is to attempt to achieve over the long term a total return in excess of that of the MSCI World Small and Mid Cap Index (with net dividends reinvested). The Fund seeks to achieve its objective through investment in a concentrated portfolio of equity and equity-related securities of primarily small and medium-sized companies, selected from all the major markets and to a lesser extent from emerging markets worldwide. The approach is focussed on valuations and bottom-up fundamental research of individual companies.
Fund particulars
| Launch date | 01 October 2007 |
|---|---|
| Domicile | Ireland |
| Structure | UCITS |
| Base currency | USD |
| Dealing | Daily |
| Min. investment | £10,000 |
| Benchmarks | MSCI World Small Mid Cap |
| MSCI World |
Portfolio manager
Harry Fraser
Harry Fraser
Harry joined OP in August 2011. He was previously employed by Herald Investment Management as a research analyst covering the media sector for a total of 5 years. He graduated from Newcastle University. He manages global smaller companies portfolios and contributes to the overall investment selection.
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Global Smaller Companies Strategy
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Commentary
The strategy had a relatively good month as cyclical and European stocks continued to perform well. This was offset slightly by our energy exposure (NOV and Hallador Energy). We initiated a position in the preference shares of LG Household & Healthcare (LG H&H) in the month.
LG H&H is a Korean consumer goods company with three core businesses: Home Care & Daily Beauty (HDB), Refreshments (primarily Coca-Cola bottling) and Cosmetics. Since its IPO in 2001, LG H&H has grown revenues per share by nine times, improved its balance sheet from net debt to net cash and provided a total shareholder return of 27% per year. HDB and Refreshments comprise 50% of operating profit and are stable businesses which have grown 5% per year over the last decade. Cosmetics makes up the other half and has grown at about 14% per year, driven primarily by its luxury skin care brand “The History of Whoo” in China.
A large part of Whoo sales is to Chinese consumers through resellers buying the products in duty-free stores in Korea. This channel has been hit by COVID related travel restrictions as well as recent rebate negotiations between Korean duty-free stores and resellers, which has also impacted peers such as Estee Lauder and Amorepacific. We believe Whoo’s brand equity in China remains strong and that LG H&H’s management will steer the company through the current headwinds, as they have done in the past. As travel between Korea and China returns to normal, we expect to see sales recover led by duty-free retail sales.
The current valuation of the ordinary shares is 15 times next year’s earnings which is the lowest valuation in the company’s history. Its long-term average is 26 times and its peers currently trade on over 30 times earnings. The preference shares, which we bought for this strategy, trade at a 60% discount to the ordinary shares despite having marginally better economic rights (a slightly higher dividend). Therefore, the preference shares are effectively valued at around seven times earnings: a bargain based on our view of the company’s solid HDB and Refreshment businesses and longer-term growth potential in Cosmetics.
Commentary
The strategy remains attractively valued at just over ten times next year’s earnings and a small premium to book value. The upside to our target prices is over 90%.
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