There is a lot to love about smaller companies. They’re usually innovative, entrepreneurial and have the potential to enjoy rapid growth.
The fact that relatively few analysts monitor this area of the market, especially in comparison to their larger cap cousins, also enables them to pretty much fly under the radar. This means their share prices can increase sharply if they deliver better-than-expected results, launch exciting products, or secure lucrative contracts.
However, there are potential downsides. Younger, growing firms will usually be more vulnerable and many end up failing, rather than delivering bumper profits.
That’s why investing in a special smaller companies fund, run by a dedicated manager, is more sensible than choosing individual business as it reduces your risk.
The good news is there are plenty of such portfolios covering different parts of the world – and we have highlighted seven that could be worth considering this ISA season.
Let’s start with our home market and the Unicorn UK Smaller Companies fund. We like the fund’s concentrated nature – it currently has 46 holdings – as well as its concentration on understanding businesses in detail. One favoured name is Ricardo, an environmental and engineering consultancy, which added 0.4% to the fund’s overall performance during February*. “Although Ricardo did not release any trading related news flow during the month, its share price continued to perform well following a strong half year trading update, which was released towards the end of January,” noted the manager in an update.
Elsewhere, the TB Amati UK Listed Smaller Companies fund is another to consider in this area. This portfolio of 65-70 companies focuses on structural growth businesses in the small and mid-cap part of the UK market. The managers look for companies with barriers to entry, a competitive advantage, revenue visibility, pricing power, sustainable growth, an adequate balance sheet, the ability to finance growth, incentivised management with a good track record and takeover potential.
Our first contender, Jupiter European Smaller Companies, is a relatively new fund that was only launched back in February 2020. Its managers, Mark Heslop and Phil Macartney, look to buy and hold high quality companies that they believe are experiencing secular long-term growth. The fund is diversified in terms of both industry and country allocation. Industrials currently has the largest sector exposure with 26.4% of assets, followed by 15.9% in financials*.
Another option is the Barings Europe Select trust that’s run by a team of four co-managers: Nicholas Williams, Colin Riddles, Rosemary Simmonds, William Cuss. They employ a growth at reasonable price (GARP) philosophy meaning they look for companies that can continue to grow regardless of the economic backdrop but won’t pay speculative prices for them. 17.5% of the portfolio is currently invested in companies listed in France**. Italy and the Netherlands have the next largest allocations at 12.7% and 11.6% respectively.
The United States is home to many exciting small and mid-cap companies and two funds we like in this area are Artemis US Smaller Companies and T.Rowe Price US Smaller Companies Equity.
Let’s take Artemis first. This fund typically holds between 50 and 70 stocks out of a potential investment universe of more than 2,000 names. The manager, Cormac Weldon, and his team have constantly refined their investment process over many years. They will use multiple information sources to generate ideas. This has resulted in steady, consistent outperformance. While the fund invests mainly in small caps, it will have some mid-cap exposure.
The T.Rowe fund, meanwhile, benefits from a flexible approach that enables its manager to search for growth and value opportunities. The man at the helm is Curt Organt, who has been involved in the industry for more than a quarter of a century so boasts plenty of experience. In a recent update, Curt pointed out that industrials and business services, information technology, health care, and financials remain the dominating sectors in the portfolio, all with greater than 10% of the equity allocation*.
We have identified funds in different parts of the world that may be worth considering, but what if you’re after a broader approach? Well, one option is the Abrdn Global Smaller Companies fund, which searches for companies everywhere, even in the emerging markets.
Manager Kirsty Desson aims to identify companies that exhibit a range of high quality characteristics, operate in growing markets, and display positive business momentum.
US-based Lattice Semiconductor is the biggest holding currently at 4.2%, while other positions include Keywords Studios, the Dublin-based video game business*.
*Source: fund factsheet, 28 February 2023
**Source: fund factsheet, 31 January 2023
Past performance is not a reliable guide to future returns. You may not get back the amount originally invested, and tax rules can change over time. The views expressed are those of the author and fund managers and should not be taken as investment advice.