Aberdeen’s small cap funds the masters of risk/return
The group’s Asian and emerging market open- and closed-ended smaller companies funds have been among the best-performing investment portfolios of recent years.
By Joshua Ausden, News Editor, FE Trustnet
Wednesday August 22, 2012
The stellar long-term returns of smaller companies funds more often than not comes at the expense of above-average volatility.
Small cap stocks tend to have greater levels of debt on their balance sheets than large caps, are traded less often, and also tend not to pay a dividend, which all contribute to their riskier status.
In emerging markets, one may expect this trend to be magnified, since companies in developing nations are at greater risk of poor corporate governance and liquidity.
However, Aberdeen’s Asia and emerging market small cap ranges have bucked this trend, beating their respective benchmarks and peer groups in both the returns and volatility stakes.
Returns and volatility of funds vs sectors and indices
Source: FE Analytics
The Aberdeen Global Asian Smaller Companies
and Aberdeen Asian Smaller Companies
investment trusts have both significantly beaten the MSCI Asia Pacific ex Japan index over three and five years, but more surprisingly they have done so with less volatility.
The former has an annualised volatility of 18.88 per cent over five years, compared with 24.46 per cent from the all-cap MSCI Asia Pacific ex Japan index, and 23.58 per cent from the average IMA Asia Pacific ex Japan fund.
With returns of 118.24 per cent, it is by far the best-performing portfolio in the sector over five years, and only two of 66 funds have been less volatile – First State Asia Pacific Leaders
and First State Asia Pacific Sustainability
Performance of fund vs index and sector over 5-yrs
Source: FE Analytics
While the Aberdeen Asian Smaller Companies trust has been more volatile than its open-ended counterpart, it has returned significantly more and it has also been less volatile than both the MSCI Asia Pacific ex Japan index and average Asia Pacific trust over one, three, five and 10 years.
In the entire investment trust universe, it is second only to the Aberdeen New Thai
portfolio over the last decade, which has returned 673.06 per cent.
It is a similar story with the Aberdeen Global Emerging Markets Smaller Companies fund, which is the best-performing portfolio in its IMA Global Emerging Markets sector over three and five years.
It is less volatile than its sector average over both of these time periods, although it has been slightly more volatile than the MSCI Emerging Markets index.
Portfolio manager Andrew Gillan, who is involved in the running of both the Edinburgh Dragon IT
and Aberdeen Asian Smaller Companies IT, claims the group’s strict screening process
has allowed the team to gain access to high-quality companies that rival even the most stable multi-nationals.
"The balance sheets of a lot of smaller companies are even stronger than the large caps," he said. "The average company [in the Asian small cap fund] is sat on cash, which is a big plus point."
"The index itself is perhaps more volatile, but as a fund we can be more selective."
"Our overweight in the consumer sector has also boded well, as these stocks have done better in big market sell-offs compared with financials and exporters. Our indirect exposure to south-ea
st Asian companies [including Thailand and Malaysia] has helped as well."
The Aberdeen Global Asian Smaller Companies and Emerging Markets Smaller Companies funds both have a minimum investment of $1,500 and a total expense ratio (TER) of 1.98 per cent and 2.03 per cent respectively. The Aberdeen Asian Smaller Companies trust has a TER of 1.3 per cent.
All three portfolios have five crowns from FE.
Aberdeen today announced the launch of an addition to its open-ended global small cap range – the Aberdeen Global World Smaller Companies fund. The portfolio of between 40 and 60 stocks will focus on companies with a market capitalisation of below $5bn.
Sam Docherty, who heads up the global equity team running the fund, said:
"The benefits of investing globally are now ingrained with many investors as they seek diversification and to capitalise on the opportunities available around the world. However, so far much of their focus has understandably been on large cap companies."
"Smaller companies can be a complement element of portfolios, providing exposure to an under-researched asset class that behaves differently to core global equity strategies."
"By employing Aberdeen’s rigorous, bottom-up investment process, we aim to identify those companies around the world that meet our strict quality criteria, are attractively valued and offer the prospect for long-term growth."
Like the Aberdeen Global Asian Smaller Companies and Global Emerging Markets Smaller Companies funds, the new portfolio will be domiciled in Luxembourg. It will have a minimum investment of $1,000 and a TER of around 2 per cent.