Europe, the US and the UK are the three main areas Standard Life Investments’ Bambos Hambi has added dedicated active smaller company exposure. 
The manager of the £10bn Standard Life Investment Myfolio range is a big fan of using small-caps over the long term to drive outperformance.
Hambi (pictured) said: “I take the view that strategically, in the long term most managers are going to add value with mid- and smaller companies and there is a small-cap effect. So our portfolios will be strategically overweight mid- and small-cap stocks.”
Performance of smaller companies indices over 5yrs
Source: FE Analytics
Below, Bambos Hambi told FE Trustnet where he has added specific smaller company exposure in his Myfolio range and the funds he is using.
The first area where the manager takes an active allocation to smaller companies is the US and has added exposure since Donald Trump’s presidential election victory in November.
“[In the] US small cap [space] we added after Trump got elected and we’ve gone with Brown Advisory US Smaller Companies,” the fund of fund manager said.
“There they’ve got a value and a growth manager who have half the portfolio each so there is no style bias,” he added.
Hambi says he likes taking specific smaller company exposure because it means he doesn’t have to worry too much about becoming a specialist in US smaller companies, rather choosing managers and funds he trusts.
He explained: “Being based in London I am not sure I could add a lot of value there whereas these guys are on the ground and over the long term that has seemed to work really well as a theme.”
The $330m fund has been a top quartile performer over three years in the IA North American Smaller Companies sector and is above both the benchmark and sector over five years.
Performance of fund vs sector and benchmark over 5yrs
Source: FE Analytics
“They are specialists in their areas and have big teams around them. They see lots of companies and some of the stocks they have in the portfolio are owned by both sides so it is quite interesting when you see it that way,” he said.
The three crown-rated fund, which is overweight technology and industrials while underweight financials and healthcare, has a clean ongoing charges figure (OCF) of 1.75 per cent.
The US was the second best performing region-specific smaller companies region over a five-year timeframe in our previous study, though it was the least efficient when compared to its large-cap peers, beating them by just 5.71 percentage points – the lowest of any region.
The best performing small cap sector overall was Japan, but Hambi says he does not use a dedicated smaller companies fund because all-cap managers tend to be naturally weighted to that area of the market.
“In Japan we are overweight smaller companies but we do not have a dedicated fund,” the manager said.
“Our multi-cap fund manager is overweight smaller companies and we wanted a manager that was very overweight mid and smaller companies.”
The fund he uses is Morant Wright Nippon Yield, which has been a top quartile performer over one, three, five and 10 years in the IA Japan sector.
He said: “It’s a Japanese boutique that has a more deep value style and they see lots of opportunities but they see them down the market cap spectrum and it’s a very experienced team behind them.”
In fact, he says the fund, which he has owned for three years, is one of the most experienced teams he has ever come across in any market area.
However, Hambi does have dedicated small-cap exposure in the UK with two managers used in the various products.
“In the managed range we use Harry Nimmo from Standard Life Investments as you might expect because it is predominantly SLI funds,” the manager said.
FE Alpha Manager Nimmo, who doesn’t believe mean reversion applies to smaller companies, has been a top quartile performer in the IA UK Smaller Companies sector over the last decade.
However, Nimmo draws from the Numis Smaller Companies ex IT benchmark as it contains more mid-cap names: something that is important to the manager as it allows him to run his winners.
Away from the internally managed SLI range, Hambi uses Fidelity UK Smaller Companies which has a value tilt and was introduced into the range two years ago.
He said: “It was closed and they re-opened it because they saw some redemptions and we managed to get into that fund. Since we bought it the fund has soft-closed as they are trying to control capacity – something that we have encouraged.
“It’s a really good team with a great resource and it’s one of the value smaller company funds out there and fits well with the other funds we own in that area.”
The £423m fund is in the top quartile over the last five years, returning 182.05 per cent but has struggled in the more recent term.
Performance of fund vs sector and benchmark over 5yrs
Source: FE Analytics
The four crown-rated fund, run by FE Alpha Manager Alex Wright and Jonathan Winton, has an OCF of 0.95 per cent.
The fund has a focus on downside risk and protection of capital in severe selloffs which Square Mile Research said in its latest factsheet: “can be viewed as an extremely sensible approach in what has, historically, been a volatile asset class”.
It further noted: “This approach has proved very successful since the fund's launch and though there will be periods when this style of investing is out of favour it should reap rewards over the long term.”
The final area Hambi uses a dedicated smaller companies fund is in Europe, which provided the third highest regional small-cap returns in FE Trustnet’s study, but was behind the MSCI Europe ex UK Small Cap index.
“We’ve got a dedicated European smaller company fund – Mirabaud – which we seeded a couple of years ago,” the manager said.
The €42m Mirabaud Equities Europe ex-UK Small and Mid fund launched in November 2015 and has beaten the IA European Smaller Companies sector (5.19 percentage points ahead) over this time but is slightly down on the benchmark (2.5 percentage points behind the MSCI), returning 46.32 per cent since inception.
Run by Ken Nicholson and Trevor Fitzgerald, the fund has an OCF of 1.05 per cent.