Smaller companies fund - passive or active?

green_man

I will be using a smaller companies fund in my SIPP to complement my core holding of HSBC Global Strategy - Balanced.   It will form around 10% of the portfolio.  

I quite like the look of HERALD INVESTMENT TRUST (HRI) . It is Global but UK biased (50% Uk)  and focuses primarily on tech/comms companies. What I don’t like is the slightly over 1% fee, though in general it does seem to have outperformed most low cost smaller companies index funds.

Any one else using HERALD?  What are you using for smaller companies, passive or active?   Any particular recommendations worth investigating?

pip895

I recommend going for Active funds for small companies - no experience of Herald but looks good if you want tech bias and some international exposure.

AnotherJoe

Active.  I had a passive one (Global) and in two years I think it went up 1%. 

Whilst active ones were up 20-30%.

bowlhead99

Its probably a fair observation that information about smaller companies is less perfect and widespread than for large or megacap companies or even mid-cap companies, and many institutions will not be passively investing at that end of the scale. For the institutions collectively looking to deploy £billions or £trillions, a small stake in a £50m or even £1bn company is not going to move their performance needle very far - even if they take such a big stake in it that their own purchases and sales move the price of the stock making investment inefficient and illiquid. So generalising, smaller companies will be less well researched due to less interest in them, and the market for them can be less efficient.  With less efficient markets, investing passively through indexes will not necessarily give the same 'automatic good result' that it would deliver in a more efficient market.

Also if your goal is to invest in small companies, and you use an index to do that, you are weighting your money towards the very biggest companies that currently meet the index's criteria for being 'small', which seems counter-intuitive if you are keen on investing in small companies due to some perception that they will perform differently to larger ones.

green_man

bowlhead99 said:

Also if your goal is to invest in small companies, and you use an index to do that, you are weighting your money towards the very biggest companies that currently meet the index's criteria for being 'small', which seems counter-intuitive if you are keen on investing in small companies due to some perception that they will perform differently to larger ones.

Yes good point.   Interestingly, in my research I found that a number of active funds seem to run with the winners even when they get well out of the smaller companies orbit. Whilst this might seem sensible to some degree, I found one fund with a huge portion of the fund in TESLA (10% +) because it had invested long ago as a small growth stock, this just doesn’t sit right with me.

So if active is the way to go, which was my thoughts in any case.  Any comments on HERALD from anyone?

dunstonh

We operate a core and satellite approach and use passive for the core and managed for the satellite.  So, that tells you how I sit on this.  Never heard of Herald though.

Prism

I currently use Smithson and Montanaro Better World for global mid/small caps. I use Gresham House Microcap for some even smaller UK companies.
I have used other regional smaller company funds in the past.

green_man

dunstonh said:

We operate a core and satellite approach and use passive for the core and managed for the satellite.  So, that tells you how I sit on this.  Never heard of Herald though.

Thanks.  Good to hear at least this approach is a recognised approach (as opposed to my Multi asset fund thoughts)

Prism said:

I currently use Smithson and Montanaro Better World for global mid/small caps. I use Gresham House Microcap for some even smaller UK companies.
I have used other regional smaller company funds in the past.

Thanks for the info. My thoughts on the above funds, obviously not criticisms, just my personal reasons for perhaps not choosing them 

Smithson:  a bit too focused for me (31 companies) and seems more in the Mid cap sphere (average £8.9bn market cap).

Montanaro Better World - Still a bit too focused (50 companies) and a bit more mid cap (£5.5bn average), also would prefer more uk exposure if possible.

Gresham House Microcap - Again very focussed( but for uk only maybe ok), UK only (could mix with a none UK fund I guess). if anything goes to the other extreme on focusing on MicroCap stocks. 

Prism

green_man said:

dunstonh said:

We operate a core and satellite approach and use passive for the core and managed for the satellite.  So, that tells you how I sit on this.  Never heard of Herald though.

Thanks.  Good to hear at least this approach is a recognised approach (as opposed to my Multi asset fund thoughts)

Prism said:

I currently use Smithson and Montanaro Better World for global mid/small caps. I use Gresham House Microcap for some even smaller UK companies.
I have used other regional smaller company funds in the past.

Thanks for the info. My thoughts on the above funds, obviously not criticisms, just my personal reasons for perhaps not choosing them 

Smithson:  a bit too focused for me (31 companies) and seems more in the Mid cap sphere (average £8.9bn market cap).

Montanaro Better World - Still a bit too focused (50 companies) and a bit more mid cap (£5.5bn average), also would prefer more uk exposure if possible.

Gresham House Microcap - Again very focussed( but for uk only maybe ok), UK only (could mix with a none UK fund I guess). if anything goes to the other extreme on focusing on MicroCap stocks. 

Fair points, they mostly are mid caps, but you would find that most of the global smaller companies funds are pretty mid cap focused. To get more access to small caps you likely need to go for specific regional funds. There are plenty of UK choices but as soon as you go outside of the UK then the market cap starts to creep up. Maybe look at Baillie Gifford Shin Nippon, Artemis US Smaller and Montanaro European Smaller Companies (Institutional) then one of many UK choices.

I see focused or high conviction funds as a benefit rather than a downside. Too many holdings surely can't be researched fully and the fund starts to be more likely to track the index (minus fees)

AnotherJoe

green_man said:

dunstonh said:

We operate a core and satellite approach and use passive for the core and managed for the satellite.  So, that tells you how I sit on this.  Never heard of Herald though.

Thanks.  Good to hear at least this approach is a recognised approach (as opposed to my Multi asset fund thoughts)

Prism said:

I currently use Smithson and Montanaro Better World for global mid/small caps. I use Gresham House Microcap for some even smaller UK companies.
I have used other regional smaller company funds in the past.

Thanks for the info. My thoughts on the above funds, obviously not criticisms, just my personal reasons for perhaps not choosing them 

Smithson:  a bit too focused for me (31 companies) and seems more in the Mid cap sphere (average £8.9bn market cap).

Montanaro Better World - Still a bit too focused (50 companies) and a bit more mid cap (£5.5bn average), also would prefer more uk exposure if possible.

Gresham House Microcap - Again very focussed( but for uk only maybe ok), UK only (could mix with a none UK fund I guess). if anything goes to the other extreme on focusing on MicroCap stocks. 

You are never going to get very good performance with a fund that isn't focussed on a relatively small number. Smithson,  Montanaro 30-50 companies. I can believe their management can follow/Understand that many. Say it was 250 or 500 . Coudl they do that then? No. Might as well have an index with lower management fees. 

Plus, great performance from any one company out of even 100 let alone 250 or more, will make no difference to the fund overall. 

El_Torro

Regarding other Smaller Companies funds, I've been in ASI Smaller Global Companies for a few years now. It makes up about 5% of my SIPP. It has performed more or less as I expected it to, good long term returns but pretty volatile. Over the last 5 years it has grown about 120%. Compare that to the 70% growth of VLS 100 (just to use an example). 

Throwing Herald Investment Trust in the mix, it has followed a similar pattern to ASI Smaller Global Companies, though Herald appears to have considerably outperformed it in the last year or so. Its 5 year growth is 140% (so higher than ASI's 120%). ASI is only about 10% UK so that may (or may not) account for the difference in performance.