Smaller Companies and
their Sterling Exposure
A notable by-product of the Brexit referendum has been sterling volatility. The pound has already weakened by 6% against the euro since the start of the year and should there be a vote for the UK to leave the EU, further material weakening of sterling is likely, with plenty of volatility probable in the run up to the June 23rd referendum day.
In this context it is worth examining the actual sterling exposure of the Appian Smaller Company Opportunities Fund (ASCOF) given this is the Appian Fund with the highest proportion of UK assets. While the ASCOF’s equities have a 60% weighting towards UK quoted companies it should be noted that the actual exposure of these companies to the UK is much lower.
Few of these companies are predominately UK focused businesses. Many are international or global businesses with significant operations outside of the UK. A number are actually non-UK corporations which have listed in London as it is a relatively attractive market for smaller companies to go public on. Consequently, the exchange rate of sterling is less of an issue for these companies – while their shares may be quoted in sterling, should sterling weaken the value of their international operations will be worth more in sterling terms.
We have analysed the underlying sales exposure of the ASCOF’s quoted companies to the UK. On a weighted average basis, the sterling exposure of the Fund’s UK companies accounts for 21.2% of the Fund’s underlying currency exposure. In addition, some of the Fund’s non-UK equities have sales into the UK – these add a further 6.1% to the Fund’s sterling exposure. Adding in the 0.6% of the Fund held in sterling cash, the overall exposure of the Fund to sterling on a look through basis, then amounts to 27.9%. While not an insignificant amount it is substantially less than the 60% suggested by the weighting in UK equities.
More fundamental to the performance of the ASCOF over time is its investment philosophy. The Fund aims to identify high quality small and mid cap companies at attractive valuations. The strategy is ‘bottom up’ and not ‘top down’. We select equities which have sustainable business models that can generate shareholder value through economic cycles. Investing in such companies at valuations which fail to recognise the true worth of these businesses forms a sound foundation to drive potential returns in the Fund over time. The sterling exposure therefore is an outcome of our process of identifying assets that best meet our criteria. While this may result in an exposure to sterling volatility over the short term, it is more important in our view that we remain committed to a disciplined investment process that has delivered for this Fund since inception and is capable of navigating the Fund through various future challenges in order to meet its long-term objectives.