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Alternatives to Fundsmith’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 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 high-quality 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.
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)