Investment trust swaps: Global smaller companies
In the next article in the series, FE Trustnet looks at closed-ended options for investors who want exposure to smaller companies listed outside of the UK.
Smaller companies and the funds that invest in them outperform larger companies and their funds, according to FE Trustnet
figures, and the advantages of investment trusts mean they have the potential to outperform by an even greater extent.
With European funds, for example, the IT Europe sector has beaten the IMA Europe ex UK sector over 10 years, while the IT European Smaller Companies sector has outperformed both and IMA European Smaller Companies by an even greater amount.
Although there are fewer portfolios in the IT European Smaller Companies sector, the pattern is repeated with the larger UK sectors, too.
Performance of sectors over 10-yrs
Source: FE Analytics
This suggests that investors looking for long-term growth should at least consider trusts that focus on small caps, many of which are available on discounts thanks to the depressed economic sentiment.
On the continent, Montanaro European Smaller Companies Trust has the best record over 10 and five years, returning 379.98 per cent over the longer time frame, according to data from FE Analytics
Over five years it has only made 2.95 per cent, although the MSCI Europe index has lost a fifth of its value – 19.59 per cent – in that time.
The trust’s 10-year returns were lower than those of the open-ended Threadneedle European Smaller Companies
fund, although this may be in part due to the former's performance fee: this takes 15 per cent of the amount the trust outperforms its MSCI Europe ex UK benchmark by, plus an extra 2 per cent.
The major selling point of the fund is that it is available on a discount of 11.7 per cent – according to AIC figures – meaning that investors will gain access to the assets of the trust for less than nine-tenths of their market value.
Many investors may not be convinced by the case for holding a European fund – even if the region is cheap and there is the potential for left-field events to severely impact the continent.
While Asia is not free from risk – the debate about the effects of the slowdown in China is far from over – many professional investors think the continent will continue to grow faster than the West.
Aberdeen Asian Smaller Companies
is the standout portfolio in the sector, returning a massive 869.02 per cent over 10 years, according to data from FE Analytics
The fund is the best performer in the IT Asia Pacific ex Japan Equities sector over 10, five, three and one years.
Performance of trust vs sector over 10-yrs
Source: FE Analytics
Tom Tuite Dalton, analyst at Winterflood Securities, says that the new share offering represents a good opportunity, although rival fund First State Scottish Oriental Smaller Companies is available on a discount of 2.44 per cent.
He also warns that although Asian smaller companies have been "flavour of the month" their outperformance against the region’s large caps may not continue for ever.
"However, we have long been positive on Aberdeen’s Asian funds, including the small cap fund," he added.
For investors who prefer to stick to the developed world, FE Alpha Manager Robert Siddles' F&C US Smaller Companies
trust is one option.
Performance of trust vs fund and index over 10-yrs
Source: FE Analytics
Siddles has run both this closed-ended trust and an open-ended mirror fund
– which in a recent interview
he told FE Trustnet
was identical in composition – for more than 10 years.
Our data shows that the trust has substantially outperformed the fund over the past decade, making 200.08 per cent compared with the fund’s 149.74 per cent, corresponding to 25 per cent extra returns on the original investment.
Siddles told FE Trustnet
that he thinks the US is set for a manufacturing boom, as cheap natural gas has given the country’s industry a massive competitive advantage.
For investors who prefer to hire a professional to make the regional allocation decisions, F&C Global Smaller Companies has a strong track record.
It is the best performing in the IT Global Growth sector over 10 years, returning 387.2 per cent.
The fund offers access to both the Aberdeen Asian Smaller Companies and Scottish Oriental Smaller Companies trusts, and uses other funds to access both Asia and Japan.
In the developed world, manager Peter Ewins picks individual stocks and has a high weighting to the USA – 38.3 per cent of the overall portfolio.