Brown Advisory US Smaller Cos. Underperforms Benchmark in H1 2025 as NAV Lags Russell 2000

Brown Advisory US Smaller Companies: NAV Up 4.2%, But Well Behind a Hot Russell 2000

Brown Advisory US Smaller Companies (BASC) posted a mixed half-year to 31 December 2025. The net asset value (NAV) per share rose 4.2% to 1,476.1p, but that lagged a very strong small-cap backdrop, with the sterling-adjusted Russell 2000 Total Return index up 17.1%. The share price did better, up 9.4% to 1,390.0p, which helped narrow the discount to NAV from 10.4% to 5.8%.

It was a tough period to be conservative. The Board puts the underperformance down to the manager’s quality-first approach in a momentum-driven market – particularly in healthcare, information technology and industrials, where speculative, AI-fuelled names outpaced steadier operators.

Key numbers at a glance

Metric	31 Dec 2025	30 Jun 2025	Change
NAV per share	1,476.1p	1,416.7p	+4.2%
Share price	1,390.0p	1,270.0p	+9.4%
Discount to NAV	5.8%	10.4%	Narrowed
Benchmark (Russell 2000 TR, £)	10,113.4	8,637.0	+17.1%
Ongoing charges	1.02%	1.01%	–
Investments (fair value)	£161.5m	£155.4m	+£6.1m
Cash	£7.1m	£8.0m	-£0.9m
Shares bought back (H1)	202,417 shares at an average 1,326.8p (9.5% average discount)

Why BASC lagged: quality tilt in a momentum market

Small and mid-caps finally had their moment, helped by three Federal Reserve rate cuts (0.25% each) and robust corporate results. The Russell 2000 returned 14.9% in US dollars over the half, outpacing the S&P 500 at 11.0%. A slightly stronger dollar (from 1.37 to 1.34 against sterling) further boosted sterling returns to 17.1%.

Against that, BASC’s 4.2% NAV rise looks light. The Board points to underperformance concentrated in the third quarter of 2025, when more speculative, often loss-making names led the charge – especially across AI-inflated areas of healthcare and information technology, and within industrials. BASC’s discipline around balance-sheet strength and quality cash flows meant it sat out some of the froth.

Discount narrows as buybacks kick in

Shareholders did get a tangible benefit: the discount tightened to 5.8% by the period end. The trust repurchased 202,417 shares at an average price of 1,326.8p during the half, at an average 9.5% discount. That ongoing buyback stance appears to be helping discount volatility and has supported the share price return of 9.4% – ahead of the NAV move.

At 31 December 2025, 6,892,043 shares were held in treasury, with 11,331,370 shares in public hands.

Costs, fee cut and no gearing

The ongoing charges ratio edged to 1.02% from 1.01%. Management fees were reduced from 1 January 2025 and are now 0.65% on the first £200 million, 0.6% on the next £300 million and 0.5% thereafter. The fee for the six months to 31 December 2025 was £551,000, down from £628,000 in the prior year period.

There was no gearing deployed over the half, which helped risk control but likely cost some upside in a rising market. Finance costs were minimal at £2,000.

Income statement and reserves: capital gains, revenue loss

The period was capital-driven. Gains on investments were £6.9 million, while revenue was a loss of £295,000. Total net return came in at £6.6 million, equivalent to 57.4p per share (revenue loss (2.6)p, capital return 60.0p).

The revenue reserve stood at a deficit of £11.0 million at 31 December 2025. The Company notes that dividends can be paid only from the revenue reserve and, as at the period end, there were no available earnings of this type. No dividend information was disclosed in the RNS.

Balance sheet and liquidity

Net assets rose to £167.3 million. The portfolio was entirely Level 1 (quoted) holdings at fair value of £161.5 million, with cash of £7.1 million and creditors of £1.5 million. Cash decreased by £0.9 million over the half, reflecting buybacks and operating outflows offset by a net £2.1 million inflow from trading activity (more sales than purchases).

Continuation vote and redemption mechanism: shareholder safeguards

The Board knows performance matters. There is a continuation vote scheduled at the November 2026 AGM, in line with the three-year cycle. Separately, the Board has put in place a redemption mechanism: if BASC’s NAV performance does not outperform the benchmark over the five-year period from 1 July 2023 to 30 June 2028, shareholders will have the option to tender some or all shares at close to NAV, less costs.

In short, there is a time-bound path to address long-term underperformance, and the Board will be seeking shareholder views ahead of the continuation vote.

Outlook 2026: supportive backdrop, but watch rates, valuations and geopolitics

The Chair highlights a still-supportive US setup – a healthy economy, restrained inflation and further potential rate cuts – with smaller companies poised to benefit from domestic fiscal measures and incentives. The risk list is familiar: interest rates may not fall as quickly as markets now expect; valuations across parts of the market look full; and any disappointment around AI-related capital expenditure could unsettle sentiment.

Newly elevated geopolitical risks add another layer of uncertainty. If markets tilt back toward fundamentals and away from momentum, BASC’s quality bias could come back into favour.

My take: what this means for BASC holders

• Performance scorecard: Absolute returns were positive, but the relative miss vs a roaring small-cap benchmark is the headline negative. The manager’s style was out of sync with the quarter’s risk-on surge.
• Discount progress: The narrowing to 5.8% and active buybacks are clear positives. If performance stabilises, there’s room for the discount to tighten further.
• Fee alignment: The 2025 fee cut and the structure based on the lower of market cap or NAV are shareholder-friendly.
• Income profile: With a revenue loss and a negative revenue reserve, this remains a capital-growth story. Income seekers should note the lack of distributable revenue at period end.
• Safeguards in place: The 2026 continuation vote and the five-year tender mechanism provide accountability and a potential path to liquidity at close to NAV if long-term performance underwhelms.
• Set-up for 2026: If markets rotate back to fundamentals and quality, BASC’s approach could re-rate. Conversely, if speculative, theme-led leadership persists, relative returns may remain choppy.

Net-net, this update is a blend of operational discipline, discount progress and style headwinds. For long-term investors who buy the quality small-cap thesis – and are reassured by the Board’s safeguards – BASC remains a considered way to get US small-cap exposure, with the caveat that style cycles can be painful while they last.