Small cap funds trounce multi cap rivals
Managers that focus further down the market cap spectrum are benefitting the most from the global recovery, in both developed and developing markets.
Small cap funds have outperformed their multi-cap rivals in the medium- and long-term, according to
FE Trustnet research.
The average fund in each of the UK Smaller Companies, European Smaller Companies, North American Smaller Companies and Japanese Smaller Companies sectors has beaten its multi-cap equivalent ove three, five and 10 years.
Performance of sectors over 10-yrs
Source: FE Analytics
The list of best-performing portfolios is also dominated by those with a small cap focus. Over a three-year period, four of the five best-performing funds concentrate on smaller companies.
Aberdeen Global Asian Smaller Companies
and
Aberdeen Global Emerging Markets Smaller Companies take the first and second spot over five years, with returns of 108.6 and 95.7 per cent respectively.
Tim Cockerill, head of collectives research at Rowan Dartington, says this trend of outperformance is likely to continue in the long-term.
"Smaller companies funds have the ability to outperform and in the longer-term they have done," he explained. "One factor is that decision-making can be done more quickly, as there tends to be fewer problems with liquidity."
"If you can find a smaller company which is a leader in a market, it’s a recipe for success."
Harry Nimmo’s investment in ASOS is one of the biggest success stories in the smaller companies universe of recent years, for example.
The FE Alpha Manager added the online retailer to his
Standard Life UK Smaller Companies portfolio when it was 80p a share. In spite of stuttering performance in the last 12 months, its price is currently just shy of £15.
Cockerill thinks many fund managers are looking towards smaller companies to add value to their portfolios, since large caps are so well researched.
"If we look at Glaxo for example, the view was that it would perform very well because it’s big, has high cash flow but it never seemed to translate into share price movement," he said.
"Managers have had time to take in the way the world is right now and say 'let’s find companies which have got strong balance sheets, high cash flow and a strong order book'."
A recent
FE Trustnet article revealed that an increasing number of funds in the UK All Companies and UK Equity Income sectors
have benefitted from adopting a small and mid cap focus.
Cockerill highlights two new funds that aim to benefit from the trend to smaller companies: Nimmo’s Standard Life Investments Global Smaller Companies fund, which was launched in January, and the Schroder Small Cap Discovery portfolio, which opened in March.
With the growth in developing markets, and Asia in particular, among the most significant and publicised global trends, Cockerill says the two Aberdeen funds mentioned above are well-placed for further outperformance.
Performance of funds vs sectors over 5-yrs
Source: FE Analytics
"I think those two themes – Asia and small companies – will be very strong in the next five to 10 years," he added.
Even taking into consideration that the two funds are focused in booming sectors, they have vastly outperformed their respective peer groups.
"I think that they are using a very strong team," said Cockerill. "Aberdeen have had a very good run in the last one or two years. They feature in the top-10 of many sectors. They are quite conservative which I think is good in the current investment climate."
Hugh Young, managing director of Aberdeen Asset Management Asia,
told FE Trustnet earlier this month that his teams manage large cap funds in the same way they manage small caps – with the same focus on digging out the details of the companies and not relying on macro trends.
Young said the outlook for the year ahead in Asia was steady and that he doesn't expect exceptionally good or bad performance for companies based in the region.