Smaller companies fund - passive or active?

Prism

Anything with a negative correlation to a core equity holding can be used to reduce overall volatility if that matters to you and also to give a performance boost by rebalancing between the two categories as required. You can try and get a bit of both by playing around with risk/return curves and the efficient frontier.

darkidoe

Thrugelmir said:

Smaller companies historically have provided a negative correlation to large companies. 

Are they? I always thought they are correlated but would be more volatile hence there’s more opportunities for size premium.

Linton

I would be amazed if small companies were negatively correlated against large - rising in a globle crash?

Morningstar can produce 3-year correlations between funds in a portfolio.  I have set up a dummy portfolio of index trackers to help understand the correlation between markets:  These figures date from Jan 2020 as the more recent ones show significatly less correlation generally because of the Covid global crash/recovery.

Large vs Small
US Big/US Small: 0.88
Euro Big/Euro Small: 0.90
Japan big/Japan Small: 0.92

Geographies
US Big/EUR big: 0.68
US Big/Japan Big: 0.79
Eu big/Japan big: 0.65
US Small/Euro Small: 0.61
US Small/Japan Small: 0.68
Eur Small/Japan Small: 0.64

So it appears that small companies improves the diversification between geographies though they are not very different from their large company equivalents, at least for trackers.  However looking at the January 2020 figures for my 100% active growth portfolio:

US Big/US Small: 0.87 
US Small/Eur Small: 0.59
US Small/Japan Small: 0.64
Eur small/Japan Small: 0.57
UK small/US Small: 0.49
UK small/EU small: 0.78
UK Small/Japan small: 0.52

Sadly for this purpose, apart from US, my large company investment is in global funds.  However, in all comparable cases the correlation is less than with trackers. 

One other thing to note - a correlation of 1 does not mean the returns are similar, but rather that the funds move up and down together,

NedS

El_Torro said:

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).

Another holder of ASI Global Smaller Companies here, and I also really like SLS (Standard Life UK Smaller Co Investment Trust) which again can be pretty volatile but has given good results (OEIC fund version available too, but I prefer ITs for less liquid assets), and I have no issue with a pure UK smaller companies holding as a satellite fund. I've held SLS on and off since 2013 always heavily buying the dips and have more recently diversified into ASI Global Smaller Companies to give myself more global exposure.