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Small change

Joanne Ellul reports on renewed interest in small caps

As the risk appetite of investors returns and global stockmarkets improve, smaller companies have rallied and asset managers are launching global smaller companies funds to take advantage of the upswing.

Recent launches in the global small-cap arena include Standard Life’s global smaller companies fund, which was launched in January for head of smaller companies Harry Nimmo.

Last week, Schroders launched a small-cap discovery fund for head of global and international small-cap equities Matthew Dobbs.
The fund invests primarily in emerging markets and Asia, excluding Japan, but it can invest in companies that are outside these areas but derive their growth from them.

Rowan Dartington head of collectives research Tim Cockerill says: “It is a good time to be launching small-cap funds when risk is starting to return back to the table and small-cap stocks are not expensive.

“Small caps outperform large caps in the long term. Despite the fact there are periods of under-performance, I do not see that dynamic changing and small caps could be a good long-term story.”

Cockerill says investors should choose funds based on how they suit their risk and return profile.

He says: “Standard Life’s Harry Nimmo is going to be more conservative in stockpicking and will not just focus on high-growth companies. Over 10 years, the Schroders fund should return more, as it is taking on more risk because of where it is investing.”

For some, the idea of investing in emerging markets is risky and investing in smaller companies in emerging markets seems even riskier.

But Cockerill says: “The accounts should be simpler than large-cap companies in emerging markets, because smaller businesses tend to be more straightforward.”

Cockerill says that when investing in global smaller companies, it is fundamental to pick the right manager.

He says: “You need quite extensive research and teams to do the ground work. However, smaller companies are not well covered by analysts, which means there is more opportunity to add value.”

Bestinvest senior investment adviser Adrian Lowcock says he prefers region-specific global small-cap funds.

He says: “We recommend that investors look at region-specific funds when looking to invest globally, as they tend to have local teams on the ground covering the region.”

Invesco Perpetual head of global equities Nick Hamilton says choice has been limited for investors interested in global smaller companies.

He says: “Running global smaller companies is hard, it is the largest part of the equity market by number of stocks.”

Hamilton says there are around 7,000 to 8,000 companies under £5bn in market cap globally.

He believes that while small caps have picked up in performance, there could be headwinds ahead.

He says: “Smaller companies have rallied since September but the companies are more exposed to tail risk. If financing becomes an issue, it will hurt the smallest companies the most.”

Invesco Perpetual’s £345.4m global smaller companies fund, managed by senior managing director Bob Yerbury, is invested across 38 countries, and one of the overweight positions is Japan.

Hamilton says: “Last year we maintained our over-weight to Japan, where valuations have got cheaper and equities are bouncing right now.

“By contrast, US small caps have always been expensive.”

Whitechurch Securities managing director Gavin Haynes says: “Smaller companies are less researched than blue-chip stocks and so provide good opportunities for active managers to add value.”

He adds: “Taking a global perspective provides a wealth of opportunities for good stockpickers, such as Nimmo, who says his global small-cap universe is over 6,000 companies.

“It also provides exposure to companies based in faster-growing areas of the global economy, such as emerging markets.”

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