Toone, who heads up the Margetts St Johns Realistic Core fund, believes the various long-term headwinds that face the UK economy make better diversified global small cap funds a more attractive prospect.
"There’s an ongoing debate in the industry about the merits of an overweight position in our domestic market," he said.
"A couple of years ago, we looked at the risks in the UK and thought the only logical step was to adopt a more global focus."
"There’s a natural prejudice about volatility in global and global small cap funds, but this is unjustified. If you look at the volatility of a global small cap fund and a UK small cap fund, there’s not a lot of difference."
"A global focus gives the manager a greater pool of stocks to choose from, with some exposure to high growth markets which aren’t as affected by the western debt crisis."
The manager points to FE Alpha Manager Bob Yerbury’s Invesco Perpetual Global Smaller Companies fund as the best global small cap option. The £325m fund is one of Toone’s top-10 holdings, accounting for 1.84 per cent of his portfolio.
According to FE Analytics data, over the last decade Yerbury’s fund is only 0.3 per cent more volatile than the average vehicle in IMA UK Smaller Companies. It has returned 47.72 per cent more than the sector during this time, and significantly outperformed over three and five years as well.
Performance of fund vs sectors over 10-yrs
Source: FE Analytics
The fund has also consistently beaten its IMA Global sector and benchmark.
Although Toone is a big fan of the global small cap space, he believes there is a shortage of options available to investors.
"With the exception of Invesco Perpetual Global Smaller Companies, there’s a real dearth of global small cap funds in the [Global] sector," he said.
"We had a look at the F&C Global Smaller Companies trust, but it was too volatile for our liking. We’ll be looking closely at Harry Nimmo’s new fund as well, but apart from that there’s little choice on offer."
"There was a similar problem with global equity income funds a few years back, but since then there has been a wave of fund launches and mass inflows. I wouldn’t be surprised if the same thing happened [with global small caps]," Toone added.
Andy Parsons, head of investment research at The Share Centre, also thinks investors should be looking to the global small cap space.
"For many investors, exposure to smaller companies is confined to a traditional UK fund aiming to combine and blend large cap with a handful of small to mid cap stocks; however, for the more adventurous investor it can be quite restricting to stay within the UK shorelines," he explained.
Like Toone, he believes Yerbury’s vehicle is the standout global small cap performer and points to the team’s management of risk as one of its biggest strengths.
He said: "At the end of December 2011 this fund had 447 holdings, providing investors with the comfort of knowing risk and diversification are spread across a vast number of companies and more importantly across geographical regions as well."
"The fund is managed on a team basis by Invesco Perpetual, with individuals having responsibility for identifying investment opportunities from within their geographical area of expertise. All ideas are presented to their colleagues and discussed, ensuring that only the very best ideas are taken forward and included within the portfolio."
"It is currently exposed to around 30 different countries and the largest holding currently only accounts for 0.88 per cent of the fund."
FE Alpha Manager Tim Wood’s McInroy & Wood Smaller Companies fund is another possible option for investors. The FE Five Crown-rated portfolio has outperformed Yerbury’s vehicle over one, three, five and 10 years, and boasts one of the best records in the entire IMA Global sector.
Performance of funds vs sector over 10-yrs
| Name |
1-yr returns (%) |
3-yr returns (%) |
5-yr returns (%) | 10-yr returns (%) |
| McInroy & Wood - Smaller Companies |
-3.0 |
84.52 |
50.17 |
209.94 |
| Invesco Perp - Global Smaller Companies |
-7.38 |
79.18 |
33.82 |
151.19 |
| IMA Global |
-3.53 |
40.57 |
11.98 |
45.45 |
Source: FE Analytics
However, with a minimum investment of £10,000, the £39m portfolio is an unrealistic prospect for many retail investors. Invesco Perpetual Global Smaller Companies, on the other hand, has a minimum investment of just £500.
The only other pure global small cap funds in the IMA unit trust and OEIC universe apart from these two are Schroder ISF Global Small Cap Energy, Schroder ISF Global Smaller Companies and the Vanguard Global Small-Cap Index tracking fund.