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Lack of US small-cap funds blamed on low demand

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Guide to US small and mid-cap funds

Lack of US small-cap funds blamed on low demand

There does not appear to be much choice for clients when it comes to small and mid-cap funds investing in North American companies.

The Investment Association’s North American Smaller Companies sector has just 13 funds from which investors can choose, compared with 119 funds in the Investment Association (IA) North America sector.

Despite the richness and maturity of the US stock market, most IA North American funds focus on just the largest listed companies in America, and not on smaller or mid-cap stocks.

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Moreover, many funds in the sector do not even look at the whole continent, and ignore strongly performing companies from Canada and Mexico in favour of picking stocks only from the S&P 500 index of the largest American companies by market capitalisation.

Part of the reason there is not a lot of choice for investors considering investing in US small-cap funds may be due to performance trends between the two sectors.

Over the past three years, according to data from FE Trustnet, the IA North America sector average has gained a near-12 percentage points lead on the IA North American Smaller Companies sector.

The popularity of US smaller and mid-cap funds is less among UK retail investors, data from the Investment Association has found.

Over the past year, North America funds have seen inflows in terms of millions of pounds coming into the sector, with January 2016 net retail sales reaching a one-year high, compared with the outflows seen in December 2016.

Conversely, US small and mid-cap funds saw consistent outflows over the past year, only rebounding slightly in April 2016 with a net positive flow of investor money into the sector, as the table shows.

Table: Popularity of US equity fund sectors, based on fund sales

Equity Net Retail Sales by Sector (£m)
Apr-15Jun-15Sep-15Dec-15Jan-16Apr-16
North America4,029,750 99,595,484 99,348,578 -38,083,604 157,406,012 40,569,177
North American Smaller Companies-8,550,624 -4,199,242 -1,521,491 -4,654,222 -776,950 3,852,976
Total-4,520,874 95,396,242 97,827,087 -42,737,826 156,629,062 44,422,153

Source: Investment Association

While fund launches in the larger-cap sector continue - a recent example being the new Standard Life Investments’ American Equity Income fund, managed by Scott Eun and Warren Gibbon - there have been few developments in the small-cap arena.

Income

Another reason for US small and mid-cap funds failing to prove as popular as the larger-cap rivals could be the current search for income among investors.

This is the view of Robert Siddles, manager of the Jupiter US Smaller Companies trust, who comments: “US small cap is considered niche, particularly as US small-caps do not generally have a yield, and a lot of emphasis is on sectors which generate an income, particularly for retirees in a low interest-rate environment.

“Dividends are less important in the US, and the yield on the index is only just about 1 per cent. Most of this comes from sectors with more limited capital appreciation potential.”

According to Cormac Weldon, manager of the £64m Artemis US Smaller Companies fund, the familiarity of big-name brands may be another factor.