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Role of European smaller companies funds

This article is part of
Guide to European Smaller Companies Funds

Investors looking for potentially higher returns who can tolerate potentially higher risk should consider this asset class, says Nick Williams, manager of the Baring Europe Select trust.

Mr Williams says European small companies as an asset class can also potentially help the level of diversification in one’s holdings.

Because of higher volatility than overall equity markets, Laurent Inglebert, investment manager at Aberdeen Asset Management, says the part this type of fund should play in the portfolio should be part of an asset allocation decision.

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He says the proportion the fund should take up will depend on the individual requirements of the investor, which should be assessed along with the rest of the investor’s portfolio and their risk appetite.

Alain Caffort, co-manager of the Pictet Small Cap Europe fund, says European smaller companies funds should be used to complement a core European equity allocation.

He adds the inclusion of European Smaller Companies funds within a global or European equity allocation allows an adviser to add a specialised, concentrated and active stock-picking and potentially increase alpha generation for their clients.

In terms of selection Mr Caffort says it is obvious that advisers will pay attention to performance.

He says it is necessary but not a sufficient condition in the sense that investment process is paramount to select the best fund for a client.

Mr Caffort says: “Smaller companies present more risk than larger companies (liquidity risk and beta) so a fund’s investment process should allow to have a balance between having a concentrated portfolio with strong convictions (alpha generation) but with also enough diversification in terms of investment themes and sectors.

“The investment process should also include elements that control the portfolio’s risk to make sure it is not skewed towards a certain style which can negatively impact performance.

“Last but not least, investment manager’s experience is key especially given the size of the universe.”

For advisers, Ollie Beckett, manager of Henderson Horizon Pan European Smaller Companies fund, says it is important to select the European smaller companies fund that most closely matches their client’s investment objectives and attitude to risk, rather than just picking the best performer.

Central to that he says is the importance of understanding the philosophy of the fund manager, their areas of expertise, experience and any restrictions of the fund’s investment universe (for example, market capitalisation).

For example, Mr Beckett says a fund that invests solely in the smallest 10 per cent of European companies will have a much different risk profile to one that invests in a mix of smaller and mid-cap stocks.