Smaller companies persistently outperform larger companies, not just in the UK, but around the world, according to researchers at London Business School. Between 2000 and 2016 the compound outperformance globally was 5.5%, more than 2% higher than the margin by which UK smaller companies beat the more pedestrian performance of UK larger companies.
Unfortunately, global small-cap funds are thin on the ground. Managing a portfolio of small caps in one country or region is hard enough. On a global scale the challenge is magnified. In the UK alone, the bottom 10% of the market is made up of 1,678 companies. Identifying promising opportunities among these and conducting detailed research is a huge task. Globally, with a universe of about 30,000 companies, it would defeat almost any investment team, leaving many investors to acquire a spread of funds covering different markets instead.
Foreign & Colonial (F&C), however, has succeeded with its Global Smaller Companies Trust (LSE: FCS), which dates back to 1889. Its £800m portfolio is invested in more than 150 companies across the UK, the US and continental Europe, while the 20% of the portfolio invested in Japan, Asia and emerging markets is covered by third-party fund holdings. The trust maintains a bias to the UK, at nearly 30% of the portfolio.
The 200% share-price return over ten years and the 136% over five have been helped by the shares moving from a discount to net asset value (NAV – the value of the underlying portfolio) to a small premium, but the 126% investment return over five years is still 6% ahead of the MSCI World Small Companies index, which has no UK bias. Although the yield is below 1%, the dividend has gone up every year for 47 years.
F&C recently acquired a rival in Baillie Gifford’s Edinburgh Worldwide Investment Trust (LSE: EWI), with more than £400m of assets. A few years ago management was passed to Douglas Brodie’s “discovery” team, which had successfully ran global smaller companies portfolios for some years. Brodie aims to buy companies that are “not just small, but immature, and so have fantastic opportunities for long-term growth”.
The overlap with the MSCI index is just 8%. Brodie is agnostic on geographical exposure, preferring companies with a global outlook. Over 20% is invested in the UK, more than 60% in North America and exposure to emerging markets is barely 1%. Technology and healthcare account for 60% of the portfolio directly, but add up to even more when you take the application of technology in other sectors into account.
This focus on growth means that 30% of the portfolio is in companies that are not yet profitable, while up to 5% can be invested in unlisted companies. While 2016 was “a poor year”, a strong 2017 means that the three-year performance of 70% and one-year performance of 24% are well ahead of the MSCI index. As with the F&C Trust, there is a modest amount of debt, which indicates confidence and should boost returns.
However, the trust’s growth focus means there isn’t enough income to pay a dividend. Surprisingly, EWI’s shares trade at a discount of over 6% to NAV, but this looks unlikely to last. Investors after a one-stop shop for investment in global smaller companies and the outperformance they consistently deliver now have the luxury of choice.
Bill Ackman has lost his bid for three board seats at US payroll outsourcer ADP, in a “resounding rebuke” of the struggling activist investor, says
David Benoit in The Wall Street Journal. Shareholders voted on Tuesday to re-elect the company’s entire board of ten, essentially rejecting Ackman’s calls for a quicker pace of improvement at the HR software company.
The magnitude of Tuesday’s loss raises new questions about Ackman’s ability to win support during a “period of turmoil” for his fund, which has struggled in recent years and suffered a $4bn loss after a bad bet on Valeant Pharmaceuticals, says Benoit. ADP chief executive Carlos Rodriguez described the result as an “ass whooping”.
In the news this week…
• Fund manager Terry Smith has launched a sustainable investment fund that will shun “sin stocks”, including pornography, oil and tobacco, says Attracta Mooney in the Financial Times. The Fundsmith Sustainable Equity Fund is designed to meet demand for sustainable investments from bodies such as pension funds and charities, and has evolved from a portfolio that Smith ran for the charity Comic Relief for three years.
Acknowledging that many investors are sceptical about sustainable investing, Smith said that Fundsmith’s process is different from that of rival funds because of its “comprehensive exclusion list, the focus on economic factors and its performance record”. But there are no plans to launch a version available to individual investors, said Smith, due to lack of demand.
• Berkshire Hathaway’s insurance-company holdings have made Warren Buffett billions of dollars over the decades. But that streak could be ending, says Noah Buhayar on Bloomberg. Berkshire is likely to report big claims costs for the third quarter due to natural disasters. In October, Barclays analysts cut third-quarter estimates for Berkshire by a third. But despite gloomy forecasts for insurers as a whole, Berkshire’s shares are up 15% this year and trading near a record high – Buffett investors clearly aren’t overly concerned.