InvestmentsApr 19 2013

Take 5: Global smaller companies funds

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Smaller companies are universally understood among investment managers to deliver better long-term returns than their large-cap cousins, primarily because they have more room to grow.

As markets become more globalised and companies in developing markets adopt better corporate governance practices, no longer are investors tied to investments on these shores. It is now possible to invest in funds that offer access to smaller companies from emerging markets in Africa and east Asia.

Here are some things to consider when looking for a fund.

1. Assess the need for smaller companies exposure. One reason to invest in smaller companies is because of the potential for higher growth over the long term, but this also comes with added risk compared to larger companies. The client might not be willing to take on this extra risk depending on their investment horizon.

2. Consider how a global smaller companies fund will contribute to a portfolio. If the portfolio already holds a number of funds that tap into markets globally but there is a need for smaller companies exposure, it may be necessary to access the same market for small-cap. Doing so in a global fund makes the process simpler and is a good way to avoid having too many holdings in an investment portfolio.

3. Does it offer exposure to all the right markets? Most funds in this sector have a heavy bias towards the UK, North America and Europe, but only have minority holdings in places like Africa, Asia, Australia and New Zealand. If there is no desire to have a fund that will mostly focus on the US and the UK, it will be necessary to choose a fund that focuses on a specific region.

4. Check the fund’s holdings to avoid doubling up. One problem with funds like this is that it might have holdings that are the same as other funds with an international remit. For example, a client might already hold a global growth fund that invests in a large number of small and mid-cap companies, so there is a chance there will be a great deal of crossover with a global smaller companies fund’s portfolio.

5. Hold for the long term. While small-caps are in fact fairly big companies with market capitalisations running into hundreds of millions of pounds or more, they are still more exposed to market shocks than large-caps and therefore their valuations will fluctuate with the vagaries of the market. Their share prices might move up and down in the short term, so it is recommended these funds are held for at least five years.

For more on global smaller companies funds, read our feature on the topic in the upcoming May 2013 issue.

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