How to invest money that has been transffered to SIPP

economic

Thanks again Bowlhead.

Whilst i think a small % (say 3-5%) of a portfolio maybe worthwhile, is it best to not have too much of it? If a small cap grows then eventually it wont be a small cap anymore so will have to be removed from the fund, thus limiting potential growth of the fund. Is my reasoning correct?

bowlhead99

economic wrote: »

Thanks again Bowlhead.

Whilst i think a small % (say 3-5%) of a portfolio maybe worthwhile, is it best to not have too much of it? If a small cap grows then eventually it wont be a small cap anymore so will have to be removed from the fund, thus limiting potential growth of the fund. Is my reasoning correct?

A small cap can be bought by a smallcap fund at £40m and grow to £400m (10x) which is still smallcap, or maybe £4bn, at which point (100x multiple of original market cap) it could join the FTSE100 and wouldn't really be considered by other smallcap funds.

When your smallcap fund sold it for their 10x or 100x gain they would buy something else with the proceeds and your money is not lost. If it 'drops out of the fund' due to getting too big for the strategy, that's a positive thing - the money just gets recycled into new or existing small companies within the portfolio. There is plenty of growth potential. FeverTree Drinks make nice tonic water, they listed on AIM at around £150m in 2014. Now they are worth £2.9bn which would put them in the FTSE250 if they applied to join the main market, which they haven't.

Alternatively a company could list at $10bn and be bought by a largecap fund and go on to become a $100bn company (10x) or $1000bn companiy (100x). There is growth potential in companies of all sizes really.

You may have seen me pointing out to a poster the other day who thinks that smallcap are best things since sliced bread that it's naive to think that largecap should be ignored, even though some of the headline largecap index returns are beaten quite soundly by smallcap funds in bull markets.

If you do your largecap investing by indexing you will have a large amount of money in ex-growth 'cash cows' like tobacco or oil giants and maybe not so much in the superstars of the future. You would only be buying whoever is the Facebook of today once they have grown and proved themselves, rather than the 'Next Facebook'. But you don't have to do your largecap investment by indexing, clearly SMT don't. A largecap investor can still buy a company and see it grow 10, 50, 100x if he is lucky, and the sky is the limit.

But that is not to say that just because smallcap has a theoretical size limit and largecap doesn't, you should skimp on smallcap. Again you could see a company do 10x or 100x in theory. A FeverTree 20x in three years, or significantly better, is unusual, but it can happen.

Smaller / AIM / fledgling companies can go bust in a heartbeat, or can grow rapidly; 'larger small' companies might have 50 years of history and making plenty of profits for their size but not being in an industry where they are ever going to turn into a $10bn behemoth. You get good companies and bad ones, just like you do in mid cap or large cap. Active management makes sense given increased risk and volatility and worsened information flow due to lack of analyst coverage - and companies that are not well established can die on the vine. However in the largecap world you can still easily see a Carillion or a Northern Rock, Halifax or HMV or Woolworths etc etc keel over.

So generally you can say smallcaps have a different risk profile but that doesn't mean you can't get high growth or dismal failures at all sizes. There is still plenty of potential to be taken from smallcaps and it's not really true to say 'growth is limited by the size thresholds so I will ignore them'. In your Global AllCap fund, small cap is included in the overall population of companies in scope of the fund but the 2000 small cap companies included have a much lower weighting than the 5000 larger companies, because it is after all a cap-weighted fund and will put 1000 times as much in Shell (£200bn market cap) as in Countrywide (£200m market cap), if it even bothers with something as small as Countrywide which wouldn't move the overall needle even if it doubled or halved in size.

So if you are beefing up the UK allocation of your portfolio, smallcap (or at least, a fund that is not market-cap weighted) is a good place to start imho.

To try to give a shorter answer to your original question:

"If a small cap grows then eventually it wont be a small cap anymore so will have to be removed from the fund, thus limiting potential growth of the fund. Is my reasoning correct?"

That doesn't sound correct. If a fund invests £100k in a company valued at £200m and the company goes on to be worth £2bn a decade later, and is then sold, the fund has turned its £100k into £1m for a 25% annualised rate of return. Now the fund can go and invest £1m in something else or £100k in each of ten other things, all of which can give it a 10x return or a 25% annualised rate of return. It does not need to keep hold of the original investee company forever.

So the potential growth is not really limited by removing stuff, because when you 'remove stuff' due to it getting too big, you do so by selling it off at a profit. You are getting paid cash for that stuff and the cash can be invested in more things that deliver high growth rates and large multiples of cash invested.

Whilst i think a small % (say 3-5%) of a portfolio maybe worthwhile, is it best to not have too much of it?

As largecaps have their obvious merits and are more mainstream, I would agree not to have 'too much' in smallcaps which have more risk and volatility. I don't have 50% in small companies. But 5% is fine.

grey_gym_sock

bowlhead99 wrote: »

So if you are beefing up the UK allocation of your portfolio, smallcap (or at least, a fund that is not market-cap weighted) is a good place to start imho.

i'd consider either small cap (which in practice means actively managed), or a FTSE 250 tracker (or, perhaps better, a FTSE 250 ex-investment trusts tracker, since those investment trusts are probably mostly invested in larger companies which you already have covered, and the ITs add a layer of extra charges; e.g. L&G UK mid cap index).

economic

Thanks Bowlhead.

Now that i have pretty much decided what i will do, i will invest the 200k in chunks to take advantage of the market sell off.

thanks again for everyones help.