How to spot smaller companies winners
There’s additional risk with small-cap funds but the good ones pay off
March 23, 2021, Investors Chronicle, By Mary McDougall
Funds that focus on smaller companies tend to outperform their benchmark indices by a greater proportion than their large-cap peers over time. The average share price and net asset value (NAV) total returns of UK smaller companies investment trusts increased by 99 per cent and 68 per cent, respectively, over the five years to 19 March, according to broker Winterflood. By contrast, the Numis Smaller Companies Index ex investment companies index has increased 51 per cent over the same period.
Compare this with investment trusts focused on larger UK companies, for which the average share price and NAV total returns were 54 per cent and 46 per cent, respectively, over five years to 19 March…
Not only have the smaller companies performed better, they have also beaten their benchmark by a more significant margin. This trend is well known and expected, as smaller companies are less well researched so there are more mispriced assets for managers to spot.
Global equities investment trusts focused on larger companies, meanwhile, on average made respective share price and NAV total returns of 122 per cent and 115 per cent over five years, while FTSE World index returned 100 per cent. But global investment trusts focused on smaller companies, on average, made respective share price and NAV total returns of 192 and 183 per cent, compared with 103 per cent for MSCI World Small Companies index…
Analysts think smaller companies are poised to outperform their peers as economies recover from the pandemic. While recent strong performance suggests a degree of good news is priced into the UK, James Carthew, head of investment company research at QuotedData, says: “On a relative basis, the performance of UK equities may be perking up, which should attract attention from a wider pool of investors.” Smaller companies are more geared to domestic economies so are more likely to do well as economies pick up.
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