European smaller companies – worth holding?

aroominyork

I am thinking of selling my European smaller companies fund because it doesn’t seem to outperform broader European (generally mid and large cap) funds over the long term in the way that UK smaller companies funds do. It doesn’t feel like it adds any important diversification or that selling would leave a meaningful hole in my portfolio. What do others think?

Linton

Looking at the Trustnet fund sector performances for the past 5 individual years from now to 5 years ago:


Europe (ex -UK): 4.3% 26.6% 5.2% 12.6% 0.2%
Europe Small Cos: 7.8% 29.5% 10.4% 16.9% 2.6%



So every year for the past 5 years has shown an outperformance by the European Small Companies sector.

A_T

I always think it's worth dabbling in European, Japanese and UK Smaller companies. The rest of the world not so much.

Voyager2002

A_T wrote: »

I always think it's worth dabbling in European, Japanese and UK Smaller companies. The rest of the world not so much.

I would love to find a decent managed fund to invest in Russian small companies.

dunstonh

Like most smaller companies of any region, they have their moments when they are higher and when they are lower in performance. You wont know until looking back which and when was best.

aroominyork

All good points Linton, AT and Dunston (less so, Voyager, but good luck in Russia). But there seems to be a difference between UK and European smaller companies funds. The gap between the growth of UK small cos compared to all companies is historically quite wide, so you could put a significant part of your UK allocation into smaller cos to drive your gains, and see the role of large caps less as generating comparable growth and more as downside protection. In Europe, by contrast, the difference between small caps and mid/large caps is less stark, so focusing solely on mid/large caps could give a fair trade-off between growth and downside protection.

Europe (ex -UK): 4.3% 26.6% 5.2% 12.6% 0.2%
Europe Small Cos: 7.8% 29.5% 10.4% 16.9% 2.6%

UK All Cos: 6.7% 18.4% -0.5% 10.6% 3.9%
UK Small Cos: 12.1% 32.3% -1.3% 14.0% 12.4%

bostonerimus

I would own European small cap according to the size of there capitalization. I would not under or over weight. I would not spend (or waste) time worrying about the allocation........guess what I just recommended owning an index.

aroominyork

bostonerimus wrote: »

I would own European small cap according to the size of there capitalization. I would not under or over weight. I would not spend (or waste) time worrying about the allocation........guess what I just recommended owning an index.

Nothing personal mate, but it’s getting a bit boring.

Alexland

I'm with 'boring' Boston on this one. I have never seen any long term performance data to suggest that different cap sizes outperform a cap weighted index fund over the very long term. Sure there will be some 5 year snapshots or even whole cycles where one index has done better but is there anything to demonstrate strong probability of outperformance going forwards?

Alex

aroominyork

Alexland wrote: »

I have never seen any long term performance data to suggest that different cap sizes outperform a cap weighted index fund over the very long term.

Neither have I, and I completely get diversification and the danger of trying to get a step ahead. But surely all sectors will not perform equally and maybe, just maybe, European small caps are a sector where the risk/reward upside/downside outcome is sub-optimal.

dividendhero

Alexland wrote: »

I'm with 'boring' Boston on this one. I have never seen any long term performance data to suggest that different cap sizes outperform a cap weighted index fund over the very long term. Sure there will be some 5 year snapshots or even whole cycles where one index has done better but is there anything to demonstrate strong probability of outperformance going forwards?

Alex

I suspect smaller companies do have a higher growth rate.."elephants don't gallop" comes to mind, but smaller companies will have a higher failure rate.