By Jean-Baptiste Andrieux, Reporter, Trustnet, 25 April 2024:
Fundsmith Equity and Scottish Mortgage rank high on investors’ buy lists due to their impressive performance over the past decade.
As a result, fans of the two global large-cap portfolios might also be interested in their small-cap siblings, Smithson and Edinburgh Worldwide.
In theory, small-caps should outperform larger businesses over the long term, although that hasn’t worked out in practice over the past 10 years..
However, with inflation and interest rates past their peaks, now could be a good time to reconsider small-caps. A lower rate environment should boost investors’ appetite for riskier assets, reduce borrowing costs and improve access to capital, all of which bode well for smaller companies..
Although both Smithson and Edinburgh Worldwide belong to the same sector and share a bias to growth stocks, their investment strategies have little in common.
Smithson follows a quality growth strategy, underpinned by Fundsmith’s mantra: “Buy good companies, don’t overpay, do nothing”..
By comparison, Edinburgh Worldwide has a greater focus on earlier stage, faster growth companies and holds a significant proportion in private companies, whereas Smithson has none..
Matthew Read, senior analyst at QuotedData, noted that Edinburgh Worldwide is the “most small-cap focused by some margin” in the IT Global Smaller Companies sector, whereas Smithson stands at the opposite end of the spectrum, with the strongest bias to mid-caps.
Another reason why Smithson hunts for opportunities higher up in the market cap spectrum is due to its larger size. Despite being the youngest of the two investment trusts, it has a market value of £2.1bn, while Edinburgh Worldwide has £528m.
“Smithson had a very successful IPO and, through a combination of decent performance and further issuance, it is now the largest fund in the IT Global Smaller Companies sector by some margin,” Read observed.
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