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.
| Share class | AMC* | TER** | Bloomberg | ISIN |
|---|---|---|---|---|
| I GBP Inc | ||||
| Share Class: I GBP Inc | - | - | Bloomberg: OVGSCOU ID | ISIN: IE000SKL79B0 |
| I GBP Acc | ||||
| Share Class: I GBP Acc | - | - | Bloomberg: OCUSIGU ID | ISIN: IE000YTOH6V5 |
| F GBP Inc | ||||
| Share Class: F GBP Inc | - | - | Bloomberg: OUSCFGI ID | ISIN: IE000UVCN3Y2 |
| F GBP Acc | ||||
| Share Class: F GBP Acc | - | - | Bloomberg: OUSCFGA ID | ISIN: IE000DENDJN5 |
| I USD | ||||
| Share Class: I USD | - | - | Bloomberg: OCUSCIU ID | ISIN: IE00BD3H6C20 |
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, and is a CFA Charterholder. He manages global smaller companies portfolios, and contributes to the overall investment selection.
Overview
Most of the companies in the strategy reported their annual results in the first quarter which were largely satisfactory. ‘Look-through earnings’ are now double what they were at the end of 2019 (pre-pandemic) and are expected to grow by over 20% this year. The return on equity of the portfolio is near its highest at 15% and the forward PE is close to its lowest at less than eight times. There are, of course, significant geopolitical uncertainties but we think the low valuations of these fundamentally good and well-run companies more than compensate for the additional macro risks.
Negative contributors
There are signs of a weakening consumer in the United States, so it is perhaps not surprising that Allegiant Travel, a US airline exposed to leisure travel, was the worst performer in the quarter. The company had already been struggling from a difficult 2024, which had seen significant labour cost increases (+19%) as well as continued disappointing performance from its Sunseeker hotel. Towards the end of 2024, there were signs of improvement with moderating labour and fuel costs and strengthening demand; however, a weakening consumer in recent months has already resulted in the company reducing capacity growth and lower ticket prices.
We remain attracted to Allegiant Travel because of its focus on leisure traffic from under-served cities with limited competition on its routes. This, along with a low-cost distribution channel, has historically resulted in industry leading margins and returns on capital. Maurice Gallagher, the founder and Chairman, owns 12% of the business which provides good alignment and reduces the likelihood of major capital allocation mistakes (Sunseeker being the notable exception) which is particularly important in the capital-intensive airline industry.
From a valuation perspective, the company has almost never been cheaper at less than book value. Before the pandemic, Allegiant was making net margins in the teens; while we do not anticipate the company returning to those lofty levels, the company’s competitive position remains strong and we think that 8% net margins should be attainable. The current market capitalisation is just four times those ‘recovered earnings.’
HelloFresh was the other main detractor. After over a decade where growth has been the focus, management has pivoted to focussing on profitability. The company is rationalising its logistics footprint and reducing marketing to focus on its core customers. This new approach will result in higher profitability and significantly higher free cash flow in the years ahead.
Normally a profit upgrade would result in strong share price performance; however, most market commentators continued to focus on the top line and customer numbers which perhaps explains the weak share price performance. Nevertheless, Dominik Richter (CEO) bought shares following the results and the company continues to buy back stock in the market, reducing its share count. AO World, another strategy holding, went through a similar pivot three years ago: as the profits came through, the share price nearly tripled. Like HelloFresh, AO World was heavily shorted, so the stock benefitted from additional buyers as fundamentals improved.
Positive contributors
CuriosityStream, the factual streaming company, was the standout performer in the quarter. The company significantly increased its dividend and expects to return to growth this year as it benefits from new licences and increased advertising revenues. The company has a quarter of its market capitalisation in cash, is expected to be highly free cash flow generative and will not have to pay taxes at least until the end of this decade because of its significant deferred tax losses.
The other top performer was Draegerwerk, the German medical equipment company. The company saw decent growth in order intake as new products were well received in their Safety division. Draeger is now prioritising profitability and operational efficiency which is resulting in improved margins. Management hopes to increase profit margins by 100 basis points a year for the next three years. Draeger trades on just nine times earnings and, if management can deliver on their margin expansion plans, it will be on just four times earnings in three years’ time. The balance sheet remains healthy so, with a solid outlook, management was able to raise the dividend 13%.
Conclusion
On average, our companies are expected to grow both revenues and profits healthily this year. Over half the portfolio companies have bought back shares in the last year and we would expect a similar percentage in the year ahead. The gross dividend yield of 4.1% is the highest in the strategy’s history. Low valuations and solid growth make us optimistic that returns will be good in the coming years.
| Cumulative | Annualised | ||||||
|---|---|---|---|---|---|---|---|
| 1 month | YTD | 1 year | 3 years | 5 years | Launch* | Launch* | |
| Fund (I shares) | +4.9 | +0.8 | +5.0 | +22.7 | +83.9 | +246.7 | +9.8 |
| MSCI World Small Mid Cap | -2.4 | -7.0 | +1.1 | +11.4 | +59.8 | +271.9 | +10.4 |
| IA Global Sector | -1.9 | -6.3 | +0.1 | +15.0 | +54.5 | - | - |
| Annual performance | 2024 | 2023 | 2022 | 2021 | 2020 |
|---|---|---|---|---|---|
| Fund (I shares) | -1.1 | +23.4 | -6.4 | +8.5 | +4.5 |
| MSCI World Small Mid Cap | +11.7 | +9.6 | -9.3 | +17.7 | +12.5 |
| IA Global Sector | +21.0 | +17.3 | -8.4 | +22.9 | +12.6 |
The Class I shares (I USD) launched on 01 October 2009. Please see note below for performance prior to 2016. *Reflects the period from when Harry Fraser became portfolio manager of the Global Smaller Companies strategy on 01 January 2012. Performance is calculated net of all fees and expenses and on a total return basis, inclusive of all distributions to unit holders. The IA Global Sector is for comparison purposes only.
The value of all investments and the income from them can go down as well as up; this may be due, in part, to exchange rate fluctuations. Past performance is not a guide to future performance
| Consumer Discretionary | 24.1 | |
| Consumer Staples | 17.6 | |
| Energy | 13.2 | |
| Industrials | 11.8 | |
| Financial Services | 7.8 | |
| Communication Services | 6.4 | |
| Banks | 4.1 | |
| Insurance | 4.1 | |
| Health Care | 4.1 | |
| Information Technology | 2.3 | |
| Real Estate | 2.1 | |
| Utilities | 1.8 | |
| Cash | 0.4 |
| United Kingdom | 33.6 | |
| Germany | 11.6 | |
| Japan | 9.1 | |
| Canada | 7.4 | |
| United States | 6.7 | |
| Poland | 4.6 | |
| France | 4.4 | |
| Greece | 4.1 | |
| South Korea | 3.0 | |
| Turkey | 2.3 | |
| Italy | 2.1 | |
| Switzerland | 1.4 | |
| Cash | 0.4 |
| J D Wetherspoon | 9.5 |
| First Pacific | 8.0 |
| Jet2 | 7.8 |
| Hellofresh | 7.6 |
| Serica Energy | 6.9 |
| Frasers Group | 4.7 |
| Warsaw Stock Exchange | 4.6 |
| Trigano | 4.4 |
| Eurobank | 4.1 |
| Draegerwerk Pref | 4.1 |
| Fund | Benchmark | |
|---|---|---|
| P/E ratio (fwd) | 7.6 | 15.2 |
| P/B ratio (hist) | 1.3 | 2.0 |
| Gross div. yield (fwd) | 3.8 | 2.7 |
| Active share (%)* | 99.9 |
The Overstone UCITS Fund plc applies the UK Stewardship Code Statement of Oldfield Partners LLP as its shareholder engagement policy.
The Overstone UCITS Global Smaller Companies Fund is a constituent of the Oldfield Partners Smaller Companies Equity Composite.
Oldfield Partners LLP claims compliance with the Global Investment Performance Standards (GIPS®) and has prepared and presented this report in compliance with the GIPS standards. Oldfield Partners LLP has been independently verified for the periods 1 January 2000 to 31 December 2011 by HSBC Securities Services and from 1 January 2012 to 31 December 2023 by Ernst & Young LLP. To receive a copy of a GIPS® compliant presentation and/or a list and description of our composites, please contact us.
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