It is among the top-five best-performing sectors over one, three, five and 10 years – a feat unmatched by any other sector.
Performance of sector over 10yrs
| Name | 1yr returns (%) |
3yr returns (%) | 5yr returns (%) | 10yr returns (%) |
|---|---|---|---|---|
| IMA North American Smaller Companies | 22.38 | 40.82 | 73.52 | 169.72 |
Source: FE Analytics
Unsurprisingly, US small cap funds have been among the best-performing portfolios throughout.
Schroder US Smaller Companies has a particularly strong record over 10 years, with returns exceeding 200 per cent, while the likes of F&C US Smaller Companies and Janus US Venture lead the way over the shorter term.
In spite of this stellar performance, IMA North American Smaller Companies is ignored by the vast majority of investors.
The largest fund in the sector is FE Alpha Manager Jenny Jones’ Schroder US Smaller Companies fund, which is £526m in size.
In total, the sector has £1.7bn in assets under management (AUM). To put this in to perspective, Harry Nimmo’s Standard Life UK Smaller Companies fund has more than £1bn in AUM.
Chris Wise, investment director at Gemmell Financial Services, says that there are two main reasons why it is such an unloved area of the market.
"I suppose one of the main reasons why it isn’t a popular sector is because when investors are looking for their immediate US exposure they are more likely to look at large caps that can hopefully beat the S&P," he said.
"Thereafter, maybe managers like me have been guilty of not looking further down the cap scale and instead of just focusing on the UK Smaller Companies sector."
"However, one of the main reasons has been that Findlay Park American, which is probably the best fund in the US small cap space, has soft-closed."
"Therefore investors have favoured multi-managers who still hold it instead of buying another US small cap fund."
The offshore, $8.7bn Findlay Park American fund was soft-closed in early 2011. It has consistently beaten its composite benchmark – split 50/50 between the Russell 2000 and S&P 500 – since its launch in March 2000.
According to FE Analytics, the fund has returned 315.76 per cent over 10 years while its benchmark index has returned 145.53 per cent.
Performance of fund vs benchmark over 10yrs
Source: FE Analytics
It changed its name from Findlay Park US Smaller Companies in 2011.
Fundexpert’s Brian Dennehy says that investors have ignored the sector because there are better opportunities in other developed small cap markets.
"The reason is that very few investors have invested a small amount into the US for around a decade or so," he said.
"If they are looking for more sexy smaller companies they will turn to the UK, where there is a huge amount and a large variety of attractive businesses."
"If they are looking for a sector that is motoring at the moment they will look to Japan and if they want something that is beaten up they will go to European smaller companies."
"Broadly speaking, we haven’t been that big on the US for a number of years. We certainly haven’t been gung-ho on the US like others have been over recent months."
It is not just investors who avoid US small caps; fund houses have shown little interest in launching products into the sector. Our data shows there are only 10 constituent members of IMA North American Smaller Companies.
One of the most recently launched portfolios is Hermes US SMID Equity.
The fund’s manager, Robert Anstey, has been running the same portfolio since 2001 for internal pensions.
However, the decision to launch the fund in November last year was due to a surge in demand from European investors for a US small and mid cap strategy.
Anstey says that although it is difficult to add value in the notoriously well-researched US large cap market, that is not the case towards the smaller end of the spectrum.
"The beauty about investing in mid and small cap US companies is that you can still find businesses that are under the radar," he said.
"The majority of these companies have minimal 'Wall Street' coverage and although they could appear to be dull or boring, there are quality businesses in the index."
"US large caps are a lot more efficient, for instance there are something like 59 analysts following Apple."
However, he says the best way to capitalise on the vast US smaller companies sector is by refusing to react to changes in the macroeconomic environment.
"I can’t tell you what GDP growth will be any more than the next manager, but I can know a small business from North Dakota inside-out," he said.
Anstey is bottom-up in his approach, but looking to the macro, he says he is bullish on the outlook for US small caps as the sector will undoubtedly benefit from the recovering US economy.
"I am positive on US equities for the year," he explained.
"The index is up 14 per cent this year and is ahead of large caps, which is a very powerful move in the short term."
"Markets don’t move in a straight line and I think fundamentals will have to catch up with prices."
"For instance, it hasn’t been a great earnings season and yet stocks continue to move higher."
"Nevertheless, the US economy is growing and there are a number of favourable tailwinds such as an improving housing market, better employment figures and consumers starting to spend again."
"Companies are cash-rich and are buying back large amounts of shares. That has considerably shrunk the equity base so when investors do turn their attention back to the equities out of bonds there will be a lot of positives for the sector."