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Small caps fit in a client’s portfolio

This article is part of
Guide to Investing in Small Caps

The current conditions suit small cap investing, said Neil Hermon, co-head of UK equities at Henderson Global Investors.

When there is strong global corporate balance sheets and the availability of cheap credit there is strong potential for merger and acquisition activity, which always bodes well for small caps.

When larger companies are struggling to grow organically due to a weak global economy, there can be a tendency to buy growth via acquisitions and often at a significant price premium.

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But the proportion of a portfolio held over to small caps should not remain fixed and might change at different points in the economic cycle, or in a client’s life.

It is also important to remember that smaller companies does not just mean UK businesses.

Mr Lowcock says: “For a more aggressive client holding, around a third in smaller companies funds across all the major markets of UK, US and European.

“For smaller portfolios a global smaller companies fund can provide some diversification and for those wanting to take on less risk there funds, which invest across the capitalisation spectrum.”

Mr Lowcock says the key is to manage smaller companies exposure, as good managers can find opportunities throughout the economic cycle and are able to buy and sell assets.

However, investors should constantly monitor their exposure to smaller companies and take profits should they increase by too much, too quickly.

“As a client gets older and approaches retirement their objectives and indeed attitudes to risk are likely to change.

“Likewise investors heading towards retirement want to protect their capital and reduce equity exposure. As such I would expect exposure to smaller companies to reduce over time as attitude to risk falls.”

In addition an increase in the requirement for income should also means clients cherish other assets classes and for companies with a dividend.

While smaller companies can pay a dividend they are not core investments for income seekers.