FUNDS

We look at ex­ist­ing top per­form­ing funds in the small and mid-cap space

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Al­ter­na­tives to Fundmith’s new global smaller com­pa­nies trust

The high-pro­file launch of a new in­vest­ment trust from star man­ager Terry Smith has turned in­vestors’ at­ten­tion to global smaller com­pa­nies.

Smith’s new trust, Smith­son, will fo­cus on com­pa­nies across the globe that are too small for his flag­ship Fund­smith Eq­uity (B41YBW7) fund to in­vest in. He says the un­der-re­searched busi­nesses, which typ­i­cally have fewer in­vestors watch­ing them, pro­vide a wealth of op­por­tu­ni­ties of which to take ad­van­tage.

But this is old news to the in­vest­ment trusts and funds al­ready fo­cused on the sec­tor; a hand­ful of man­agers have been watch­ing this part of the mar­ket for years and have al­ready been reap­ing the re­wards.

HIGH PRO­FILE LAUNCH

The fact is, that while the big names of the stock mar­ket – Ama­zon, HSBC (HSBA), Glax­oSmithK­line (GSK) and Face­book, to name just a few – get much of the spot­light, the bot­tom 15% of the global mar­ket in terms of mar­ket cap­i­tal­i­sa­tion ac­tu­ally ac­counts for around 70% of the pub­licly-listed com­pa­nies in the world. Yet, while there are around 22 in­vest­ment an­a­lysts for each of the blue-chip com­pa­nies, there are just six for each of the in­vestable small-caps.

Terry Smith’s Smith­son trust will aim to raise £250m from in­vestors when it launches on 19 Oc­to­ber, with the vet­eran in­vestor putting into £25m of his own money at the out­set. But should in­vestors rush to fol­low suit or is it worth con­sid­er­ing funds which al­ready have a track record of in­vest­ing in this space?

NO RUSH TO BUY NEW TRUST

Ben Years­ley, di­rec­tor at Shore Fi­nan­cial Plan­ning, says: ‘I don’t see the point of rush­ing in and buy­ing the new Smith­son trust. Smith has a su­perb track record in the Fund­smith Eq­uity fund but that fo­cuses on large, global com­pa­nies, not small and mid-cap ones. Why rush in when there are al­ready a num­ber of very ta­lented fund man­agers avail­able?’

Among them is the In­vesco Per­pet­ual Global Smaller Com­pa­nies (BJ04HJ2) fund, which launched in 1984 and has re­turned 81% over the past five years. Al­most a third of its as­sets are in US stocks in­clud­ing lug­gage man­u­fac­turer Sam­sonite and Take-Two In­ter­ac­tives which

Smaller com­pa­nies are of­ten more dy­namic, fo­cused and en­trepreneurial than larger ones

owns video games pub­lisher Rock­star Games, prov­ing that small-cap in­vest­ing doesn’t limit man­agers to com­pa­nies you’ve never heard of. The fund has fur­ther hold­ings in Ja­panese, UK and French eq­ui­ties too.

John Botham, prod­uct di­rec­tor at In­vesco Per­pet­ual, says: ‘The UK small-cap mar­ket looks in­ter­est­ing to us at the mo­ment and we are find­ing op­por­tu­ni­ties in sec­tors such as fi­nan­cials as well as cer­tain en­ergy and in­dus­trial com­pa­nies, which are less pop­u­lar with the ma­jor­ity of in­vestors.’

A BREXIT DIS­COUNT

Many UK small-caps have largely been out of favour since the EU ref­er­en­dum in 2016, largely due to con­cerns about how a bad deal or no deal Brexit could af­fect the econ­omy. Big blue-chips on the FTSE 100 are rel­a­tively in­su­lated from this risk be­cause around three-quar­ters of their earn­ings come from over­seas so are ac­tu­ally boosted when the pound is weaker.

Botham adds: ‘In our view, some in­vestors “over-dis­count” the risks. In a sim­i­lar vein, cer­tain Asia com­pa­nies have been af­fected by the per­ceived risks around trade tar­iffs and ten­sions.’

A newer ad­di­tion to the small-cap space is the Stan­dard Life Global Smaller Com­pa­nies

(B7KVX24) fund, which launched in 2012. A top per­former in the global sec­tor, it has re­turned a hefty 123% over the past five years. In its rel­a­tively short life, the fund has at­tracted al­most £1.5bn of in­vestors’ money.

Man­ager Alan Roswell says: ‘It’s a rich uni­verse, full of high­qual­ity com­pa­nies. Global smaller com­pa­nies pro­vide real di­ver­si­fi­ca­tion for your in­vest­ment port­fo­lio, they out­per­form larger com­pa­nies and they are not as risky as you might think.’

WEIGH­ING UP THE RISKS

There are risks to in­vest­ing in this space. Smaller com­pa­nies are typ­i­cally less liq­uid than their larger coun­ter­parts, mean­ing there might not al­ways be a buyer or seller for the other side of your trade. Mean­while, their less-es­tab­lished busi­ness mod­els can make them more volatile or sus­cep­ti­ble to fail­ure. But this is also the part of the mar­ket from which the stars of to­mor­row emerge.

Botham adds: ‘Smaller com­pa­nies are of­ten more dy­namic, fo­cused and en­trepreneurial than larger ones. For long-term in­vestors, the ex­tra risks have his­tor­i­cally been well com­pen­sated by higher re­turns.’

Roswell has a good record of pick­ing small com­pa­nies which go on to be­come large-scale suc­cesses, which he is then no longer able to in­vest in un­der the re­mit of the fund. Ja­panese on­line fash­ion re­tailer Start To­day and UK-listed Dubai-based hos­pi­tal op­er­a­tor NMC Health

(NMC) are two re­cent ex­am­ples.

US FO­CUS

Cur­rently, the Stan­dard Life fund has some 40% of its as­sets in US firms in­clud­ing fast food de­liv­ery app GrubHub and home se­cu­rity com­pany Alarm.com, and 15% in UK stocks in­clud­ing sports­wear re­tailer JD Sports (JD.) and mixer drinks maker Fev­ertree Drinks (FEVR:AIM).

Years­ley at Shore adds: ‘I’m a fan of small-cap in­vest­ing and I think it’s a key com­po­nent of a well-di­ver­si­fied in­vest­ment port­fo­lio. But in­vestors would do well to look at the many ex­cel­lent funds and trusts with ta­lented man­agers, which al­ready have a proven track record in­vest­ing in this space.’ (HB)

Fev­ertree fea­tures in Stan­dard Life’s port­fo­lio

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