Like first loves, or the musical passions of our teenage
years, the research we discover at an early stage of our investment journeys
continues to shape our thoughts and actions for the rest of our lives.
My ongoing fascination with seeking out investments in smaller companies stemmed from reading Strategic Value Investing (2013) by Horan, Johnson and Robinson, Gervais Williams's The Future is Small (2014), which cited Dimson and Marsh's long-run data on the outperformance of UK smaller companies, the 2023 version of the graph displayed below, data from Deutsche Numis, showing the results of investing £1000 in 1955, smaller companies versus the All-Share index:
However, just
as those findings impinged on my developing investment consciousness in the
early to mid-2010s, so that outperformance of smaller companies began to wane.
Indeed, as many recent discussions have pointed out, the small cap premium
seems to have disappeared in the last decade, not just in the UK.
A Financial Times article from March 27th 2024 draws attention to the relative underperformance of small caps in the 'Magnificent Seven' dominated US stock markets in seven of the last eight years:
However, such
findings have not eroded my instinctive leaning towards small cap companies.
Indeed, for the long-term growth segment of my portfolio I have been redoubling
my efforts to seek out investment vehicles that provide access to global
smaller companies.
Why smaller companies?
Precisely because of their recent underperformance, and the potential for
recovery as interest rates and inflation look set to moderate.
Why global smaller companies? I
already have extensive exposure to UK smaller companies, and after the next UK
General Election the likely Labour government may not be unambiguously positive
for the UK stock market, particularly if it wins a large majority and becomes
more radical into probable second and third terms.
There are surprisingly few global smaller companies investment trusts, and the two mainstream trust options, Smithson, and The Global Smaller Companies Trust, have not kept up with the MSCI World Small Cap indices.
There are a handful of global smaller company OEICS, and two have outperformed the MSCI World Small Cap index in recent months: IFSL Marlborough Global Small Cap, and Liontrust Global Smaller Companies (see table below, data from Hargreaves Lansdown, to 28th March 2024):
In analysing
these two funds, one question immediately arises: how small is small? The
answer for each fund is 'not very', at least in UK terms, as according to
Morningstar each fund has an average market cap of about £4.7 billion. So for a
UK investor they are better understood as small and mid-cap funds.
There are
some differences between them: only one of their top 10 holdings overlaps
(Vertiv Holdings,
supplier of digital infrastructure
support services, such as data centre cooling). Marlborough has 57% in the USA,
against 65% for Liontrust. While each fund has about 40% in industrials,
Marlborough has 19% in technology, against Liontrust’s 6%.
Despite their
strong recent performance, the funds are very small: as of 29th
February 2024, Marlborough less than £5m, Liontrust less than £25m.
I have taken
a small position in the Marlborough fund (which was made available in the UK in
autumn 2022) despite the oddity of it being run for Marlborough by two English
fund managers working for the Australian asset manager Ausbil in Sydney.
Commentary on the Ausbil web pages provides useful insight on the Marlborough fund's investments in companies supporting the renewal of the USA's electricity supply system.
It’s worth
noting that the Liontrust fund had a change of manager in spring 2022.
I may invest
in Liontrust Global Smaller Companies as part of my new tax year’s SIPP
allocation.
Interesting though
these two funds are, the lack of a global microcap fund or investment trust
continues to frustrate…
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