Global Small Cap Funds

MadMat

I'd like to put a small amount into a Global Small Cap fund, as this seems an area that is not particularly well covered by my Vanguard LifeStrategy Fund. I know the VLS does hold a small percentage of Vanguard's Global small cap fund, but closer inspection shows that fund is very US focused (over 50% is US).

So any suggestions for a low cost well performing fund ?

Mat

Biggles

I put my grandchildren's' funds into the F&C Global Smaller Companies Trust. It's risen by 50% in the first two years. The main thing I like about it is that they can invest in private companies as well as publicly-listed ones, which gives them an edge over the private investor.

bowlhead99

Biggles wrote: »

I put my grandchildren's' funds into the F&C Global Smaller Companies Trust. It's risen by 50% in the first two years. The main thing I like about it is that they can invest in private companies as well as publicly-listed ones, which gives them an edge over the private investor.

If you look at the list of holdings in the last annual report, you'll see that within its £425m of investments, it had £3m in unquoted investments. http://edg1.precisionir.com/IR/EU000946-6/HTML2/fc_gsc-ra2014_0026.htm So, I'd respectfully suggest that if "the main thing you like about it" is the fact that it can hold unquoted investments, but it actually just has 1% in unquoted investments, in some Australian fund that happens not to be listed - then both it and you are not exactly embracing the world of unlisted (private equity) investments and your strategy may be misguided.

Also per the chart in those accounts, about a fifth of the returns since 2009 was attributable simply to the narrowing of discount rather than a change in NAV. So, as it's only on a 1% discount at the moment, best not to assume that's possible from here... and obviously the fact it can grow 50% in a couple of years is rather less likely to happen when markets are no longer recovering from the bottom of a recession.

Not saying it's a bad fund by any means, but if the aspects you value are things like it taking its specialist exposure to Asian smaller companies and a tiny amount of unlisted exposure by holding other funds, you can of course take those exposures in (say) Aberdeen Jap Smaller Companies and Scottish Oriental Smaller Companies yourself directly. Then you avoid F&C charging you a whole layer of management fees and performance fees on top of the costs from the underlying fund, which you could simply hold directly. There are plenty of specialist investment trusts that hold Asian or EM stocks and the same is true for private equity.

Of course, if OP is merely looking for a one stop shop to get some smaller company exposure round the world, he may prefer to have F&C go get it and sell it on to him as part of a package, and avoid buying those other underlying portfolio components himself. He may do better with specialist active managers in the smallcap space than by holding an index such as Vanguard Global Small Cap, which inevitably holds a lot of crappy smaller companies alongside the ones the specialist managers think are any good. Incidentally that Vanguard smallcap fund is *not* one of the holdings of their Lifestrategy fund, although I suppose there will be a very very small amount of the LS fund that qualifies as small or medium cap.

MadMat

bowlhead99 wrote: »

. Incidentally that Vanguard smallcap fund is *not* one of the holdings of their Lifestrategy fund, although I suppose there will be a very very small amount of the LS fund that qualifies as small or medium cap.

Yes on double checking, it doesn't, I've been looking at both emerging markets and small cap funds recently and got myself in a bit of a muddle, VLS does include some emerging markets exposure, but not small cap!

Mat

le_loup

MadMat wrote: »

Vanguard's Global small cap fund, but closer inspection shows that fund is very US focused (over 50% is US).

Isn't that the whole point of passive global small companies? If 50% of quoted small company global activity is - that's how you should invest.
If you are not really a passive investor then you may wish to second guess the market.

MadMat

le_loup wrote: »

Isn't that the whole point of passive global small companies? If 50% of quoted small company global activity is - that's how you should invest.
If you are not really a passive investor then you may wish to second guess the market.

I'm pretty new to this, but I'm finding it hard to believe that 50% of the worlds small companies are listed in the US, prepared to be told I'm wrong though

But to be honest I'm not too bothered about the passive V active thing, as long as the performance is good and the costs low! The Vanguard fund does seem to tick both those boxes to me, just wasn't sure about it being 50% US

Mat

masonic

MadMat wrote: »

I'm pretty new to this, but I'm finding it hard to believe that 50% of the worlds small companies are listed in the US, prepared to be told I'm wrong though

Trackers don't work on the basis of number of companies. They work on the basis of market capitalisation.

TCA

MadMat wrote: »

I'm pretty new to this, but I'm finding it hard to believe that 50% of the worlds small companies are listed in the US, prepared to be told I'm wrong though

As masonic said above, the VLS tracker is based on market capitalisation, so in reality you're investing in the *biggest* of the world's smaller companies. For that reason I buy active investments for my exposure in this sector.

bowlhead99

MadMat wrote: »

I'm pretty new to this, but I'm finding it hard to believe that 50% of the worlds small companies are listed in the US, prepared to be told I'm wrong though

If you look at the US's Russell 2000 index (which is ~10% of the Russell 3000 index which has pretty much all the whole US market covered), you get a US smallcap universe of companies valued from maybe $200m up to about $4,5,6,7bn depending how recently they reset the constituent holdings.

It's generally composed of about 2000 companies with a weighted average of something like $1.5-1.7bn market cap. Although like most indexes, it's skewed to the biggest holdings in the index so in reality the median company size (the 1000th down in the list of 2000) is only about $700m.

Anyway if you multiply out the ~2000 companies by about $1.7bn weighted average size you get to a capitalisation of $3-3.5 trillion.

Whereas in the UK, our *entire* all-share index (which includes the £100bn giants like HSBC and Shell etc) has a capitalisation of only $3-3.5 trillion or so.

After taking out the more than 4/5ths of the UK index which is made up of FTSE100 companies (the entry point for that shortlist is about $5-6bn in market cap) you can see that we only have maybe $500bn to $600bn left over in what you would probably term 'small caps' in a global context (our FTSE 250 and Smallcap indexes). That's only a 6th or a 7th of what the US has in that size range.

So, once you then go and look at the Vanguard tracker and the index it follows... the UK is about 8% of MSCI global smallcap, and the US is about 7x higher at 59%, which isn't at all surprising from the analysis above. You could literally go and count up and multiply out all the companies if you were still a little shocked at just how big the US stockmarket is.

By the time you have Japan at 10-11%, Canada at 5%, and developed Europe up there as well, you've pretty much covered everything in the world smallcap index with the US hugely dominant.

There are lots more countries in the world and obviously countries like China and Russia have lots of companies in them BUT as the stock markets are less developed, a lot of the companies are not listed or are not liquid enough to be considered for inclusion. By contrast the US market has plenty of domestic and globally-operating companies operating from its stock markets. If you want to throw money at smallcap based on indexes you pretty much have to include a lot of US.

Obviously the other approach to your asset allocation, rather than being forced into the US, is to decide on some other arbitrary level of exposure across geographic listings. E.g., just say you'll put 20% of your exposure into the UK markets (because that's where you live... even though that's more than the market cap represents on a world stage) ... 20% into North America (even though that's a lot less than the market cap represents on the world stage, because you don't want to be over concentrated), 20% into Europe, 20% into Japan/Asia Pacific, 20% into Emerging. Or something like that.

That can still be done pretty passively because once you've selected the strategies to get your exposure and the funds through which you'll do it, it's not exactly hard to hold a few funds. Every so often you could simply re-balance when the ratios shifted drastically from 20/20/20/20/20 to some other level due to outperformance or underperformance of some of them. In following that approach you could employ active fund managers who were specialists in the regions or you could just follow the local indexes for better or worse.

But to be honest I'm not too bothered about the passive V active thing, as long as the performance is good and the costs low! The Vanguard fund does seem to tick both those boxes to me, just wasn't sure about it being 50% US

Remember that 'being US' refers to where the company is listed but does not necessarily mean that's where the bulk of its revenues or costs are incurred. So it doesn't necessarily imply a huge overweighting to the US domestic market or US dollar though of course market sentiment there will typically pull all the companies in the same direction at the same time which is why it's recommended to be diversified internationally.

But market sentiment in the US affects us in the UK and Europe anyway so you can't entirely escape a big smallcap downturn unless it's exclusively due to local US politics and taxes and regulations etc.

If you were looking for value for money, you can see from the performance tables that the "global smallcap" indexes have done better than the "global smallcap ex-US" indexes http://www.msci.com/products/indexes/size/small_cap/performance.html over the last 3, 5,10 years.

So you are not exactly grabbing a bargain at the moment, with the 50% of your smallcap assets that you might consider allocating to the US via a tracker or US-heavy active fund. Still, perhaps the smallcaps there have been booming because the economy is strengthening, growth improving and higher than Europe etc etc., so you are just being asked to pay good money for quality earnings and growth. Nobody can be sure of future direction, they can only tell you it would have been cheaper to have bought into the companies two years ago than it is today and that some measures imply you probably get better returns by investing when things are relatively cheaper than when they are relatively expensive ; of course, there will always be exceptions.

le_loup wrote: »

Isn't that the whole point of passive global small companies? If 50% of quoted small company global activity is - that's how you should invest.
If you are not really a passive investor then you may wish to second guess the market.

I generally think that as I'm not trying to deploy trillions into the market, I don't need to spread myself by market capitalisation to get all my money invested easily, so I do depart from indexes; the cap-weighted index is just one way of allocating investment.

There are plenty of people who, in largecaps for example, will be happy to embrace something like a Vanguard Lifestrategy or Blackrock Consensus fund at the core of their portfolio - where the regional allocations don't strictly follow the relative sizes of the free float of companies on the local stockmarkets. Nutmeg and others use similar concepts - the approach results in a system based on regional indexes for cheap exposure that you as an investor can hold passively, and yet the manager does the asset allocation between regions or asset classes rather than have it driven entirely by global market cap.

If you wanted everything dictated by global market cap, you could simply hold a single All-World tracker, but that seems to be acknowledged as lower quality investing than having individual buckets for regions or industries. I guess because an allocation to small-cap is likely to be a relatively smaller piece of the pie than an allocation to other 'mainstream' companies around the world, some people will not want to go the extra mile and break it up into individual buckets too.

Although I've held that global smallcap index fund before at times, I generally would prefer to either buy components of my smallcap exposure separately, or at least find a manager who thinks along the same lines as I do and then go and select the companies (domestically or internationally) to fill the allocation for me. Smallcaps and less developed markets are places where size-based indexes are not necessarily destined to beat a smart manager or two who can navigate the dross.

Of course having said all that if you are only looking to put a 'small amount' into the asset class it really doesn't matter how much overthinking you put into managing microcomponents of the returns. Just buy some sort of a general exposure and worry about the detail when you have tens of thousands to lose.

MadMat

Thanks very much for taking the time to write that very informative post! Given me lots to think about! Although at the sort of amount I'm thinking of I think your last comment is the one I need to take on board and just buy some general exposure for now.

I have 100/month going into VLS 80 via my ISA and 150/month going into VLS100 via my Sipp, So there is really only scope to redirect a portion of that to a single fund.

Mat

Biggles

bowlhead99 wrote: »

I'd respectfully suggest that if "the main thing you like about it" is the fact that it can hold unquoted investments

Yeah, that was sloppy wording. I meant, 'what I like in addition to the obvious, ie that it has global coverage and is in smaller companies'!

Not saying it's a bad fund by any means, but if the aspects you value are things like it taking its specialist exposure to Asian smaller companies and a tiny amount of unlisted exposure by holding other funds, you can of course take those exposures in (say) Aberdeen Jap Smaller Companies and Scottish Oriental Smaller Companies yourself directly. Then you avoid F&C charging you a whole layer of management fees and performance fees on top of the costs from the underlying fund, which you could simply hold directly.

But don't I then just pay admin charges to Aberdeen or Scottish Oriental instead?

I speak as someone who has invested directly in (mainly) UK equities for decades but was looking for a longterm bare trust arrangement for my annoyingly fast-growing horde of grandchildren. I have not dealt in Investment Trusts before.