In the fourth and final part of our series on small caps we look at smaller company funds with global horizons.

These can be a good way of investing in small caps in markets where buying individual stocks might be a challenge, either because you are restricted from investing or because it is difficult to get sufficient information to make an informed decision.

Some of these funds focus on smaller firms from across the globe and others specialise in specific regions or countries like North America, Europe and Japan.

WHY CONSIDER EXPOSURE TO GLOBAL SMALL CAPS?

The data suggests smaller companies offer investors scope for better returns versus their large cap counterparts at least judged on the performance of the MSCI World Small Cap index versus the MSCI World. Just like domestic small caps this dynamic exists largely because these businesses have more room to grow.

The MSCI World Small Cap index has delivered annualised returns to investors over a three-, five- and 10-year period 20.1%, 21.9% and 18% respectively outperforming the MSCI World Large Cap index.

Over the same time periods three- five- and 10-year periods, the MSCI World Large Cap index has returned a more modest 7.8%, 12.5% and 11%.

Nish Patel manager of The Global Smaller Companies Trust (GSCT) says: ‘If you look over long periods of time smaller companies have generally outperformed larger companies and the main reason for that is that the earnings growth of smaller companies seems to be greater than that of larger companies as they are starting off from a lower base.

‘Many of these companies are also not very well known and not widely followed by sell-side analysts. So, when they are discovered, the valuations of these businesses tend to expand.’

WHAT’S IN THE MSCI WORLD SMALL CAP AND MSCI WORLD LARGE CAP INDICES?

MSCI World Small Cap index captures 23 developed markets and has 3,979 constituents as of 31 December 2024.

MSCI World Large Cap index captures 23 developed markets and has 596 constituents as of 31 December 2024.

Over the past one, three and five years Patel’s charge has beaten the average for the Global Smaller Companies AIC (Association of Investment Companies) sector.

A range of holdings make up Patel’s top 10 including a US producer of building materials Eagle Materials (EXP:NYSE) – whose shares have gained 9% over the past year, US barge operator Kirby Corp (KEX:NYSE) and US manufacturer and services provider Curtiss-Wright Corp (CW:NYSE) – whose shares have gained 52% over the past year.  

With Patel’s fund he hopes to give investors access to the very best smaller company opportunities from developed and emerging markets.

‘We want to offer investors quality, fast-growth smaller companies with lower levels of risk and volatility,’ he says.

While its longer-term performance is mixed Edinburgh Worldwide Investment Trust (EWI) has done well over the past year, returning 33.7% to beat the sector average performance of 13.6%.

The Baillie Gifford Managed trust includes diverse holdings ranging from privately-owned Space Exploration Technologies, its largest holding at 12.3%, to online freelance jobs board Upwork (UPWK:NASDAQ). The trust is currently subject to pressure from US activist hedge fund Saba, with an EGM requisitioned for 14 February.

Dan Whitestone, co-manager of the recently launched BlackRock Global Smaller Companies (BRTCR04) fund said: ‘Investing in global smaller companies can provide diversification benefits to client portfolios as the stocks may not move in lockstep with larger, more established companies, helping to reduce overall portfolio risk. Many investors are underweight small-cap exposure in their portfolios, despite small caps outperforming large caps over the long term by around 2.5% per annum.’

His co-manager Matt Betts adds: ‘Within this large universe, the companies we [look] to invest in are characterised by having strong management teams, defensible market positions, differentiated or competitive product offerings, and are underpinned by structural growth drivers.’

The US domestic market may get a lift from Donald Trump’s policy agenda and a  global small cap fund which has already been performing well is Artemis US Smaller Companies (BMMV576).

This fund is managed by Cormac Weldon and holds the likes of trucking company Saia (SAIA: NASDAQ), investment banking firm Jefferies Financial (JEF:NYSE) and global real estate company Jones Lang LaSalle (JLL:NYSE).

RISKS TO CONSIDER WHEN INVESTING IN GLOBAL SMALLER COMPANY FUNDS

There are risks you need to think about before investing in global smaller company funds. Some of these are the same as investing in small caps in general – because they are early stage and often less diversified these businesses are particularly vulnerable to setbacks and they likely have less access to capital than their larger peers.

For global smaller companies in particular, you also need to consider whether the corporate governance standards are different in the relevant country and, obviously the impact of currency movements and the impact this might have on the value of underlying holdings in fund portfolios.

MARKET CAP OF SMALLER COMPANIES

What is considered a small cap company varies vastly depending on what region you invest in. In the US for example the market cap of a small cap company could be anything from $250 million to $3-$4 billion – the latter market cap would qualify a listed company as a mid cap on the London market.

The rule of thumb for the market value of a small cap company in the UK by contrast ranges from a few million pounds up to around £400 million. This is logical when you consider the average market cap of the MSCI USA index is $87.6 billion which is a higher valuation than all but four names in the entire MSCI UK index.

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