Smaller companies within a wider portfolio

Audaxer

Linton wrote: »

In my growth portfolio I am 47% large, 28% Midrange and 24% small. As to whether the SC premium exists consider these average 5 year returns for funds in the various geographic sectors...

UK All companies: 66.4%
UK Smaller companies: 111.7%

North America: 121.5%
North America Smaller Companies: 121.2%

Europe ex UK:87.5%
Europe smaller companies:120%

Japan:114.5%
Japan Small Companies:177.5%

Looks pretty clear to me that the premium exists except for the USA and you dont have to wait decades to benefit from it.

Linton, I'd be interested to know how often you rebalance your growth portfolio back to the original percentages of your allocation?

coastline

During a cycle small caps tend to do much better than large caps.
In a downturn they tend to fall heavily..

UK..

https://d.ibtimes.co.uk/en/full/1411199/small-caps-1.jpg

USA..

http://www.moneysense.ca/wp-content/uploads/2015/03/Screen-Shot-2015-03-10-at-12.24.34-PM.png

http://www.moneysense.ca/wp-content/uploads/2016/03/Screen-Shot-2016-03-08-at-2.52.36-PM.png

http://business.nasdaq.com/media/Small%20Cap%20INDEX%20RESEARCH%20Chart%201_tcm5044-34761.JPG

Linton

Audaxer wrote: »

Linton, I'd be interested to know how often you rebalance your growth portfolio back to the original percentages of your allocation?

I will seriously look at it once per year when I have to sell units from the SIPPs and transfer the money into cash savings or S&S ISAs. And also during the past year I have been cutting down on some duplications. In both situations the process would be to sell the unneeded funds, get a new geography/sector/size allocation report and then distribute some or all of the money amongst the remaining funds as required to get the overall allocations back close to what they were a couple of years ago.

The allocations against geographies and company sizes are independent. So for example there is no attempt to balance Japan Small Companies against Japan Large companies - I dont hold enough funds to make that level of control practicable.

Linton

coastline wrote: »

During a cycle small caps tend to do much better than large caps.
In a downturn they tend to fall heavily..

UK..

https://d.ibtimes.co.uk/en/full/1411199/small-caps-1.jpg

I havent checked all the graphs, but looking at the UK one the % fall difference actually isnt nearly as big as it looks because of the distortion caused by linear scaling...

From a trustnet chart graph it would seem that from Feb 2007 to the lowest point in March 2009 UK Small Company funds fell about 48% and UK all company funds fell around 42%.

bostonerimus

My cap weighted approach results in 6% of my equities being small and micro cap and they make up around 4% of my entire portfolio. Fama French would not approved.

Audaxer

Linton wrote: »

I will seriously look at it once per year when I have to sell units from the SIPPs and transfer the money into cash savings or S&S ISAs. And also during the past year I have been cutting down on some duplications. In both situations the process would be to sell the unneeded funds, get a new geography/sector/size allocation report and then distribute some or all of the money amongst the remaining funds as required to get the overall allocations back close to what they were a couple of years ago.

The allocations against geographies and company sizes are independent. So for example there is no attempt to balance Japan Small Companies against Japan Large companies - I dont hold enough funds to make that level of control practicable.

Thanks, I was looking at an example regarding the power of rebalancing and I thought in a portfolio with a lot of volatile funds peaking at different times, like probably your Growth portfolio has, that is where rebalancing once a year down to original percentages for each fund would be most beneficial.

Morphoton

Looking at Equities I am 47% in mid/small/micro caps. If you include the VCT's I own then the inclusive figure is 58%. (Assuming VCTs are 100% smaller).
In fact 100% of my US, European & Japanese equity exposure is in mid/small/micro caps. However my total equity exposure is less than 50%. I have been in these for around 20 years and some areas have seen 2 drops of around 80% during this period.
I take the view that whilst individual areas may show higher volatility in small vs large caps there is likely to be less correlation between small caps of different areas vs the equivalent large caps. Also there is some evidence that over the very long term, smaller caps over the world tend to give higher returns compared with large caps.
Because of this I have gone with a barbell strategy of a high % of smaller caps but a modest overall equity weighting.
As long as you are OK with the potential volatility/drawdowns then I would not worry too much.

davieg11

I have a portfolio with 85% equities and 10% of this is smaller companies. Old Mutual UK Mid Cap has 1 year +29.36%, 3 years +73.31%, 5 years +148.61, 10 years +251.26. I also have SL SLI Global Smaller Companies. 1 year +24.85%, 3 years +74.54%, 5 years +126.67%. Definitely worth having and rebalancing every year. After the next crash I'm increasing to 20% of my portfolio.

aroominyork

Morphoton wrote: »

Looking at Equities I am 47% in mid/small/micro caps. If you include the VCT's I own then the inclusive figure is 58%. (Assuming VCTs are 100% smaller).
In fact 100% of my US, European & Japanese equity exposure is in mid/small/micro caps. However my total equity exposure is less than 50%. I have been in these for around 20 years and some areas have seen 2 drops of around 80% during this period.
I take the view that whilst individual areas may show higher volatility in small vs large caps there is likely to be less correlation between small caps of different areas vs the equivalent large caps. Also there is some evidence that over the very long term, smaller caps over the world tend to give higher returns compared with large caps.
Because of this I have gone with a barbell strategy of a high % of smaller caps but a modest overall equity weighting.
As long as you are OK with the potential volatility/drawdowns then I would not worry too much.

Interesting. So you are saying that a lower equity allocation with a high % of smaller cos, provides better returns over time than a higher equity allocation focused on large caps. Do you have any stats/articles (good ones!)/evidence to demonstrate this? Also, have you looked at the minimum period of time to make this a productive strategy taking into account risk associated with the increased volatility?

Prism

For reference MCSI places 15% of the worlds developed market companies in its mid cap index, 14% in its small cap index and 1% micro cap. For my portfolio I am a little over those percentages at around 40% mid/small cap