Understanding the risks of Small Companies Funds

pip895

Just doing a bit of analysis of my funds and asset allocation and have realised that my allocation to IMA Small companies has swollen this year from around 4% to over 20%. Mainly due to additional purchases I might add, although they have also done very well with some funds up more than 40%. :j
In addition to SC funds I also have 5% in VCT’s and a high proportion of my UK Equity income, UK All Co. and Europe funds (representing 30% in total) also skewed towards smaller companies. Combined this represents a large overweight position in smaller companies - mainly UK. While I am not overly concerned as this fits in with my investment strategy, I would like to ensure that I fully understand the risks associated with SC.

My understanding:-
1.Volatility Risk
SC funds are often said to be more volatile than others – most of the funds I have are not unduly volatile with an average TN score of 75, most dropped no more than the UT UK All Companies sector Average in the August 2011 correction/crash. Could (or have in the past) other types of shock disproportionately affected SC funds?

2.Recession
SC funds go down more than others in a recession – however recessions don’t happen overnight and I feel sure I could address my overweight position if this looked likely.

3.Bubble/Overvaluation
I am aware that SC’s are no longer in value territory – They seem to share this with most other UK equities and seem less bad than say the US?
What have I missed? Is this over allocation something I need to address urgently or just keep an eye on?

planteria

like you, i think it is a good long-term sector. i think you cover the risks well..anyone else want to add to the list?

worth pointing out that some SC funds spread across a lot more companies than funds in other sectors, so by definition they are spreading the risk.

also, when i have done research, ive been pleasantly surprised at how different the portfolios are between different funds. Marlborough Spec Sit, Cazenove SC and Old Mutual SC all look very different...which I like, as I hold all three.

puk999

pip895 wrote: »

not unduly volatile with an average TN score of 75

What's a TN score? I would like to assess the volatility of my funds too.

westy22

TN = TrustNet www.trustnet.com

pip895

puk999 wrote: »

What's a TN score? I would like to assess the volatility of my funds too.

Sorry - being ambiguous there FE Risk Score used by www.Trustnet.com

Rollinghome

pip895 wrote: »

... and I feel sure I could address my overweight position if this looked likely.

You possibly need to remember that if something looks likely to you then it will also look likely to others - and markets move before the click of the trigger, not on the bang. If you aren't positioned ahead of an event, are you sure you have an ability to react before others, because otherwise it's likely to be too late.

This isn't something that applies specifically to recessions or to small companies or even equities in general but to all investments.

pip895

Rollinghome wrote: »

You possibly need to remember that if something looks likely to you then it will also look likely to others - and markets move before the click of the trigger, not on the bang. If you aren't positioned ahead of an event, are you sure you have an ability to react before others, because otherwise it's likely to be too late.

This isn't something that applies specifically to recessions or to small companies or even equities in general but to all investments.

I understand that - investing in funds you have no hope of beating the market that way. It is just that previous periods of poor performance for SC were more slow burn - poor performance over months rather than .co type bubble bursts.


If valuations were to go very high (I wish:D) - into bubble territory I hope I will have the sense to get out - not seeing that at he moment though. I like the fact that SC funds don't react as much to QE talk as others.:)

pip895

In order to look into this further I have been taking a look for long term graphs showing the ima smaller companies sector. I haven't been very successful (I'm looking for data over longer than 10 years ideally)- I did find one rather fuzzy graph that I thought rather interesting though.

It plots the FTSE UK Small Co & All Share against the IMA UK Small Co & All companies going back to 1995. What is immediately apparent is how closely the FTS All share tracks the IMA All companies sector. But also how differently the FTSE small companies plots from the IMA Small companies. The former lagging the others by a significant margin and the latter beating them by an even larger margin!

If I have interpreted it right, :oit looks like a very clear demonstration on why it would be a poor idea to use trackers for your small company exposure!

http://www.sharesmagazine.co.uk/wp-content/uploads/2013/08/Chart2-475x324.jpg

Anyone got a clearer version of this graph they could post?

Linton

pip895 wrote: »

In order to look into this further I have been taking a look for long term graphs showing the ima smaller companies sector. I haven't been very successful (I'm looking for data over longer than 10 years ideally)- I did find one rather fuzzy graph that I thought rather interesting though.

It plots the FTSE UK Small Co & All Share against the IMA UK Small Co & All companies going back to 1995. What is immediately apparent is how closely the FTS All share tracks the IMA All companies sector. But also how differently the FTSE small companies plots from the IMA Small companies. The former lagging the others by a significant margin and the latter beating them by an even larger margin!

If I have interpreted it right, :oit looks like a very clear demonstration on why it would be a poor idea to use trackers for your small company exposure!

http://www.sharesmagazine.co.uk/wp-content/uploads/2013/08/Chart2-475x324.jpg

Anyone got a clearer version of this graph they could post?

One of the problems with the Small Companies sector is that what makes a company "small" is ill defined. Many UK SC funds invest significantly in at least the lower half of the FTSE250 index and for such funds the FTSE SC index may not be appropriate. So when choosing a UK SC fund you do need to look carefully at its major holdings.

Not that a FTSE250 investment is bad - that index has done considerably better than the FTSE UK SC over 10 years. Though oddly the SC index has matched the FTSE250 since the 2008/2009 crash, both substantially outperforming the FTSE100.

pip895

Linton wrote: »

One of the problems with the Small Companies sector is that what makes a company "small" is ill defined. Many UK SC funds invest significantly in at least the lower half of the FTSE250 index and for such funds the FTSE SC index may not be appropriate. So when choosing a UK SC fund you do need to look carefully at its major holdings.

Not that a FTSE250 investment is bad - that index has done considerably better than the FTSE UK SC over 10 years. Though oddly the SC index has matched the FTSE250 since the 2008/2009 crash, both substantially outperforming the FTSE100.

Yes I have noticed that - some funds also get driven into the FTSE 250 because of their success - Cazenove UK Small Companies is one I think - it is one reason I have been reducing my exposure to it and moving to smaller funds such as Unicorn SC.
It would be very interesting to compare the 10+ year graphs for the FTSE 250 a well - Anyone got a link?

cathybird

Pip895, I had been looking at Cazenove - do you have other reasons for reducing your exposure to it? ...