This is for good reason of course: the resources needed to cover every small cap market are significant, meaning there are very few firms capable of running one. Moreover, there are plentiful regional small cap funds on the market with long track records, allowing investors to construct their own global small cap portfolio.
As F&C’s Gary Potter acknowledges, however, global small cap funds are a good option for investors looking for a one-stop-shop solution to global exposure and there are indeed some funds with a strong track record out there.
Funds
The three most popular global small cap funds with professional investors are Standard Life Global Smaller Companies, Baillie Gifford Global Discovery and Invesco Perpetual Global Smaller Companies.
Invesco has the longest track record and has delivered strong absolute returns over the long term. The £365m portfolio was previously run by star manager Bob Yerbury but is now team-managed, drawing on the best ideas of the group’s stable of small cap managers such as Richard Smith, Jonathan Brown and Adrian Bignell.
FE data shows the fund is a top decile performer in its IMA Global sector over the past decade, with returns of 196.04 per cent. It’s outperformed the sector average, which is also its benchmark, over three and five-year periods as well.
Performance of fund and sector over 10yrs
Source: FE Analytics
The MSCI AC World Small Cap index only has a history spanning back to 2007. Our data shows the Invesco fund has fallen short of the index over one, three and five years, but has been less volatile.
The portfolio is highly diversified, made up of more than 300 holdings. The top-10 only accounts for 8 per cent of assets. The lack of conviction may be seen as a negative by investors looking for consistent outperformance, though it should help protect the fund against single stock risk.
That said, Invesco Perpetual Global Smaller Companies does have some very punchy regional allocations. Steven Richards of Thesis said one of the negatives surrounding global small cap funds is their bias towards the US, which makes up more than 50 per cent of the MSCI benchmark. However, Invesco has only 34 per cent in the world’s largest economy, allowing the fund to have a 12 per cent position in Japan and 10 per cent in emerging Asia.
The Baillie Gifford and Standard Life funds have both been launched within the last three years or so. Headed up by FE Alpha Managers Douglas Brodie and Harry Nimmo respectively, these funds were built out of successful UK strategies and have attracted significant inflows in recent years as a result.
Both have beaten the IMA Global sector and MSCI AC World Small Cap indices since launch, though Brodie’s fund has returned significantly more and been more consistent – despite having a higher volatility overall.
Nimmo (pictured) began very well, but stock specific issues – namely ASOS and Rightmove – have led to a very poor 2014. The graph below shows the performance of the funds since the £231m Standard Life Global Smaller Companies fund was launched in January 2012. Performance of funds, sector and index since Jan 2012
Source: FE Analytics
FE Trustnet looked at whether there was a buying opportunity in Nimmo’s small cap fund in an article last week.
Brodie’s focus on tech companies, which have a 35 per cent weighting in the £151m portfolio, has contributed to both his stronger performance and higher volatility.
Nimmo and co-manager Alan Rowsell are known for holding onto their best performers, which means they often have sizeable exposure to mid-caps. Consumer products are by far their largest sector position, at 31.2 per cent.
Nimmo has 56 per cent in the US, compared to Brodie’s 40 per cent. The latter has a much higher proportion of assets in the UK and emerging markets, while Standard Life prefers Europe and Japan.
McInroy & Wood Smaller Companies is the exception that proves the rule, in that it’s the only genuine boutique outfit that has successfully run a global small cap fund.
FE Alpha Manager Tim Wood has the longest track record of any small cap manager in the IMA Global sector, leading the fund to top quartile returns over five and 10-year periods, as well as since inception in 2001.
McInroy & Wood Smaller Companies has returned an impressive 251.26 per cent over the past decade, more than doubling the returns of the IMA Global sector.
Wood is benchmark unaware, running a highly concentrated portfolio with less than 30 per cent invested in the US. UK and continental Europe are his two biggest regional positions, though he has next to nothing in emerging markets.
Unfortunately, the fund is only available on certain platforms, including Transact.
A specialised fund that investors may want to consider is Matthew Dobbs’ £92m Schroder Small Cap Discovery portfolio. The fund has a natural bias towards emerging Asia and Japan, but does have some exposure to developed markets.
Richards points out that very few global small cap funds have significant exposure to emerging markets, so this may be viewed as a good option to sit alongside a core holding.
Schroder Small Cap Discovery has managed to return just over 36 per cent since its launch in March 2012. Unfortunately, Schroders doesn’t break down its composite benchmark and so comparisons are very difficult; however, by point of reference, the MSCI AC World Small Cap index has returned 33.96 per cent, while the MSCI AC Asia Small Cap index has returned 17.55 per cent.
Performance of fund and indices since launch
Source: FE Analytics
Elsewhere, Schroders has a developed market global small cap fund which is domiciled offshore, but available in the UK.
Schroder ISF Global Smaller Companies’ sector and regional weightings are very similar to its benchmark, and while it’s consistently beaten the average global fund, it has struggled to keep up with the index. It is run by Dobbs and Richard Sennitt.
Allianz recently launched its $333m Global Small Cap Equity fund for UK investors, though it doesn’t have a sufficient track record.
In terms of cost, Baillie Gifford is the standout choice, charging customers 0.84 per cent for clean share classes. Standard Life and Invesco Perpetual charge 0.95 and 0.96 per cent respectively, with all the rest upwards of 1 per cent.
Passives
There are a couple of passive options for investors who don’t want to pay active fees. In the IMA Global sector, the go-to product is Vanguard Global Small Cap Index, which charges 0.38 per cent.
Like most trackers under the management of Vanguard, the $672m fund has a very low tracking error, thanks to its use of full replication. It has returned 76.23 per cent since launch in January 2010, just falling short of its MSCI World Small Cap benchmark.
Vanguard also has a FTSE All World ex US Small Cap ETF, which again may be of interest to investors looking to diversify their small cap exposure away from North America. There is a similar offering run by iShares.
Investment trusts
Unusually, the largest and highest-profile global small cap fund is closed-ended – the £513m F&C Global Smaller Companies trust, run by Peter Ewins.
The trust is also far and away the standout performer, delivering more than 300 per cent over 10 years, and 175 per cent over five. It is well ahead of both its IT Global sector average and composite benchmark – split 70/30 between the MSCI AC World ex UK Small Cap and Numis Smaller Companies (ex IT) indices – over three, five and 10 year periods.
Performance of trust, sector and benchmark over 10yrs
Source: FE Analytics
The strong performance has led to the trust going onto a slight premium, but Numis’ Charles Cade says its consistency and proven process make it the standout option for investors.
Ewins has a natural bias towards the UK, which has a 30 per cent weighting in the trust, second only the US at 40 per cent. The manager has next to nothing in Europe, preferring Japan and emerging Asia.
For investors looking for a bargain, Cade highlights the Edinburgh Worldwide IT, which is run by Baillie Gifford and Brodie.
"It recently switched its mandate, and is now more a small cap version of Scottish Mortgage," said Cade, who confirmed it should also be viewed as a closed-ended version to Baillie Gifford Global Discovery.
"It's able to hold a few more illiquid names than Discovery, such as IP Group. It's on a 10 per cent discount in part because it's had a difficult first year, but I think you could see that discount widen considerably if performance improves."
Cade is also a fan of the Impax Environmental Markets trust, but doesn't see it as a pure global small cap play.
"It's got a lot in small and mid-caps but this is more of a sector play," he said. "It's got a very good management team and is one we like, especially on a 12 per cent discount."
Last week, a number of experts voiced concerns over the ability of global smaller companies funds to beat their benchmarks, and provide adequate diversification. For this reason, FE Trustnet will highlight ways investors can build their own small cap exposure in an upcoming article.