Brexit woes may hit global large-caps but for investors wanting a long-term holding, US small caps will be relatively sheltered from the effect of the vote to leave, a fund manager has claimed.
According to Chris Berrier, co-portfolio manager with David Schuster of the $127m (£96m) Brown Advisory US Small-Cap Blend Fund, the Brexit vote has created a “great deal of uncertainty in markets”.
He said: “We are expecting a heightened period of volatility for some time. However, we believe the US small-cap landscape will be less impacted fundamentally.
“Today, US small-cap valuations, when compared to their large-cap peers, look relatively attractive and we would expect a premium for secular growth when it is scarce.”
The comments came as the fund marked its three year anniversary on 8 July 2016 delivering strong outperformance since inception of 8.5 per cent (net of fees on an annualised basis) against its benchmark, the Russell 2000 Index, at 6.7 per cent.
The Dublin-based Ucits fund aims to provide investors with access to the best US small-cap companies across the growth and value spectrum.
Further, according to Mr Schuster, small-caps are more insulated from the effect of a strong US dollar and weakening global demand, as approximately 80 per cent of their sales are leveraged to the US domestic economy.
He added: “As active investors with a firm focus on valuation, an environment such as this often delivers increased investment opportunity as attractive entry points materialise.
“The US small-cap landscape is so vast there are always opportunities, but at times those require patience and the stomach to handle short term price fluctuations. Historically, over the long-term, small-caps have outperformed large-caps in the US.”
In FTAdviser’s latest CPD-qualifying guide to US small and mid-caps, Jenny Jones, manager of the £1.37bn Schroder US Mid-Cap fund, said it was important to remember long-term investing means more than just three to five years, and for patient investors, putting money away now into small caps can reap rewards over the real long-term.
Ms Jones cited updates by Ibbotson Associates - part of Morningstar - which puts out yearly reports on compound annual returns of US asset classes.
Over the past 90 years US small-cap companies would have provided significant returns (in dollars) for investors.
| Compound return (%) | Growth of $1 invested in 1926 (US$) | |
| Small stocks | 12 | 26,433 |
| Large stocks | 10 | 5,390 |
| Government bonds | 5.5 | 132 |
| Treasury bills | 3.4 | 21 |
| Inflation | 2.9 | 13 |
| Source: Ibbotson Associates |
She explained: “If one looks at the long-run studies of small versus large, there is a decided advantage in favour of small for patient investors.
“Over time, small and small-to-mid-cap companies compound at a higher rate than large cap, with the result they are good vehicles for long-term wealth creation.”
However, this does require investors to be able to stomach short-term periods of volatility in the portfolio.
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