The best way to invest in small companies?

sixpence.

Hello everyone

The core of my portfolio is a Vanguard LS 60% equity. 

Partly for fun, and partly for the sake of diversification, I'm going to branch out into some satellite funds. I've been researching the best way to invest in smaller companies.

The problem is it seems to me as if no one is actually beating Vanguard's Global Small Cap Index: https://www.hl.co.uk/funds/fund-discounts,-prices--and--factsheets/search-results/v/vanguard-global-small-cap-index-income 

I had a look at these two actively managed funds:

-  https://www.hl.co.uk/funds/fund-discounts,-prices--and--factsheets/search-results/r/royal-london-uk-smaller-companies-class-m-accumulation/charts (these are UK, not global, small companies)
- https://www.hl.co.uk/funds/fund-discounts,-prices--and--factsheets/search-results/a/standard-life-inv-global-smaller-companies-s-accumulation/charts (global)

These are both actively managed and on the Hargreaves Wealth List (about 0.74% charge against Vanguard's 30%) and I just can't really find a reason to select them instead of the index in terms of best possible investment.

What do you guys think? I'm curious, would really like to hear from you!

Cheers

tacpot12

It's not unusual for a passive fund to outperform active funds, I would recommend investing in the passive fund and one of the active funds (split the amount you are prepared to invest in this sector. That way you are splitting the risk. It also depends whether you want the income or want the dividends reinvested automatically. There are a couple of ITs that are paying more dividends than the Vanguard Index. 

Prism

It depends what time frame you look at - some funds that did well during covid and lockdown have levelled off a bit since. Nothing wrong with the Vanguard fund but the companies in can get quite large at around $15bn in size. 

You might be better off looking a UK only smaller companies funds as there is a better choice, but the recent figures won't look good as UK smaller companies prices have been poor, even though the companies are doing fine.

For what its worth, I use Smithson (SSON), Strategic Equity Capital (SEC) and one fund - SDL Free Spirit.

sixpence.

Prism said:

It depends what time frame you look at - some funds that did well during covid and lockdown have levelled off a bit since. Nothing wrong with the Vanguard fund but the companies in can get quite large at around $15bn in size. 

You might be better off looking a UK only smaller companies funds as there is a better choice, but the recent figures won't look good as UK smaller companies prices have been poor, even though the companies are doing fine.

For what its worth, I use Smithson (SSON), Strategic Equity Capital (SEC) and one fund - SDL Free Spirit.

Thank you. I'd be looking at 3-5 years minimum. 

Curious as to why you chose the SDL Free Spirit? What drew you to this fund? No worries if you don't want to share.

I like the look of UK small caps actually; it seems that smaller companies do better as the economy recovers so it seems like a good notion from my perspective.

Maybe I'll split the difference between a global tracker and a UK managed funds as @tacpot12 suggests
This active fund has out preformed the FTSE 250 for the past five years so that seems to make sense: https://www.hl.co.uk/funds/fund-discounts,-prices--and--factsheets/search-results/r/royal-london-uk-smaller-companies-class-m-accumulation 

Prism

sixpence. said:

Curious as to why you chose the SDL Free Spirit? What drew you to this fund? No worries if you don't want to share.

I have followed the Buffettology fund for several years as I like the investing style but it overlapped with another fund that I held. Free Spirit was launched and I kept an eye on it. I couple of years ago Sanford removed the overlap between Buffetology and Free Spirit. Free Spirit became the focused smaller company fund of the two.

Things I like:
Its high conviction with decent percentages in the top 10 holdings
Its quality focused
It has a decent range of company sizes - £40m to £6b. Unilever is an exception for liquidity.

Downside is the slightly higher charges than I would prefer.

Richard1212

I have a large share portfolio of shares normally covering about 50 companies in about 10 different market sectors, held outside any "funds" and managed by several advisers.  My watchword has always been "diversity" in all its aspects. I base the whole portfolio on large blue chip companies that are least likely to ever let me down.

But part of diversity is not just different market sectors, geographical coverage, etc but also on taking advice about small and medium companies. Have you thought of "tracking" some small companies, researching them closely yourself etc to form your OWN portfolio----with adviser to give guidance on your prospective choices as well as their own suggestions ? As with all small companies, some work out and some do not----but when they come up as aces it is a great feeling ----besides, it's a lot more fun following your own purchases choices. 

Of course, it's not for everyone. For example, it is wise to have a solid portfolio in place to back up the small/ medium company shares that you take more of a chance on. Just an alternative to think about and perhaps widen discussion ( which will probably tell you that the idea is absurd, but has made me large sums over decades).

sixpence.

Richard1212 said:

I have a large share portfolio of shares normally covering about 50 companies in about 10 different market sectors, held outside any "funds" and managed by several advisers.  My watchword has always been "diversity" in all its aspects. I base the whole portfolio on large blue chip companies that are least likely to ever let me down.

But part of diversity is not just different market sectors, geographical coverage, etc but also on taking advice about small and medium companies. Have you thought of "tracking" some small companies, researching them closely yourself etc to form your OWN portfolio----with adviser to give guidance on your prospective choices as well as their own suggestions ? As with all small companies, some work out and some do not----but when they come up as aces it is a great feeling ----besides, it's a lot more fun following your own purchases choices. 

Of course, it's not for everyone. For example, it is wise to have a solid portfolio in place to back up the small/ medium company shares that you take more of a chance on. Just an alternative to think about and perhaps widen discussion ( which will probably tell you that the idea is absurd, but has made me large sums over decades).

To be honest, managing individual shares is of no interest to me; too time consuming and high risk. I don't want to be dismissive though, your response is objectively interesting. I prefer funds.

So, in terms of my current action, my position is:

to split the difference between a global small cap stracker and a UK small caps managed funds

I was also considering USA small caps and Japan small caps but I think UK small caps could make a big movement based on the current recovery of the economy. I could be wrong so a global small caps tracker is probably quite a good way of diluting this risk

Would you love to hear any more thoughts on this strategy if people have them?

So glad I posted the question here; always interesting to hear what people think

Cheers!

aroominyork

I dipped my toes into US small caps but then decided they don't tend to perform much differently from US large caps. I think, at the end of the day, the mantra of not trying to outperform the US index holds true.

The UK is another proposition. I hold Liontrust micro cap (about 6% of my equities) and if the UK economy/stock market ever recovers I'd expect it to do well. In the meantime, the charges are bloody high for a fund that is going nowhere (although my faith in Liontrust for UK smaller companies remains strong).

I think the idea of dividing between global index and UK active is sound.

jimjames

Maybe something else to consider is Private equity (PE) funds. These will have small companies in as well and you might find they give some diversification for your portfolio. Currently also some very big discounts so you're getting £100 of assets for £50 in some cases.

Bostonerimus1

My thoughts are; why would you seek to beat an index and why would you overweight small cap? 
Overweighting in a particular area could be seen as reducing diversification and doing it in small companies will increase risk.

Prism

Bostonerimus1 said:

My thoughts are; why would you seek to beat an index and why would you overweight small cap? 
Overweighting in a particular area could be seen as reducing diversification and doing it in small companies will increase risk.

Well small caps have historically produced a better return and increasing the exposure to small caps might reduce risk rather than increase it. It could be argued that having a high exposure at any given time to the biggest companies in the world, often from a single company is not as low risk as it might seem. Various crashes have shown that over the years.