Global Smaller Companies Trust (GSCT ) has said it will maintain a cautious investment attitude as soaring equity valuations and narrow corporate bond spreads imply complacency has set in.

Portfolio manager Nish Patel, who replaced the retiring Peter Ewins in May, noted that while inflation has come down significantly, expansionary fiscal policies, tight labour markets, ongoing wars and plans to restrict immigration and trade could rouse inflation. 

Not only would this present a dilemma to central banks, but government bond yields rising despite the start of an interest rate-cutting cycle may mean fiscal deficits do start to matter.

‘There are many uncertainties today, yet we have seen the valuation of equities expand and spreads on corporate bonds narrow,’ Patel (pictured below) said. ‘It looks like complacency is setting in and so we think it is right to proceed with caution but to take advantage of any opportunities that present themselves.’

The £836m Columbia Threadneedle trust struggled to beat its benchmark of 80% MSCI All Country World ex UK Small Cap index and 20% Deutsche Numis UK Smaller Companies index in the six months to the end of October, interim results show.

The net asset value increased to 180.8p to deliver a total return of 2.7%, while the benchmark was up 5.7%.

The shares fared even worse, gaining 1.6% to 160.6p, leaving the portfolio trading at a discount of 11.2% by the end of the period despite a ramp-up in buybacks over the half-year, with the board repurchasing 26.6 million shares versus a total of 30.2 million for the entire previous year.

Revenue returns did, however, increase 9% in the half year, allowing the board to increase the interim dividend by 0.9% to 0.7p.

The fall behind the benchmark was, in large part, due to the ongoing dominance of large-cap stocks, although Nish said ‘small caps did show signs of life with strong outperformance in July’.

Although corporate earnings were, on the whole, better than expected over the period, this ‘often did not result in share price appreciation, indicating high expectations from investors’.

While equity market valuations of smaller companies did expand over the six months, they failed to keep pace with the valuation gains made by larger companies.

Given the dominance of technology stocks, it was unsurprising that the North American portion of the portfolio delivered the greatest returns of 7.2%, although this was behind the 8.6% return from the MSCI North America Small Cap index as the strengthening dollar impacted returns in sterling.  

Critical components producer Curtiss-Wright enjoyed growth in its defence electronics and nuclear divisions, while healthcare facilities operator The Ensign Group saw momentum in occupancy, acuity and earnings. Technology reseller CDW was a drag on returns due to a slowdown in customer spending on large projects and increased competition in the industry.

The exposure to the UK weighed on the returns of the trust, as the UK part of the portfolio dropped 4.2% versus a 5.7% increase in the UK smaller companies market.

The exposure to AIM stocks, which make up 24% of the UK portfolio, was hit by fears over the removal of inheritance tax relief in the Budget, although the relief was subsequently halved by chancellor Rachel Reeves, rallying the shares.

Defence services group QinetiQ (QQ) enjoyed growth in its European business, with ‘good progression in orders’ and a switch in capital allocation away from mergers and acquisitions and towards share repurchases. Shares in Baltic Classifieds Group (BCG) rerated after fears about the classified ad platform’s exposure to the war in Ukraine subsided.

Next 15 (NFG) presented specific ‘challenges’ for Patel after reporting ‘weaker-than-expected earnings because of softness in its technology and government divisions’. The technology consultancy and marketing group also suffered a contract loss from a large client.

Patel said it was ‘frustrating’ to see Ashtead Technology (AT) underperform despite good results from the subsea and oilfield equipment rental group, as the shares dropped on ‘a lower oil price and uncertainty over the new UK government’s position towards drilling in the North Sea’.

Over the past five years, shareholder returns of 25% to the end of November are half the benchmark’s, the latest factsheet shows.