Which Global 'Small Cap'?

DairyQueen · 10 August 2018 at 9:23PM

I manage a 'pocket money portfolio' on behalf of my nephews (ages nearly 13 and just turned 11),

I add £50 monthly to an HL ISA (in my father's name - he never uses his ISA allowance) and invest the new cash around every 18 months. The ISA is earmarked for the kids.

The fund value is small - a little north of £10k - but is intended to provide each of them with a chunk of money to use for something meaningful when they are in their late teens/early 20s. Something like a car or higher education fees.

The avoidance of a JISAs was intentional as I don't want either to take control of the money by default when they reach 18. The timescale for the investment is therefore not fixed. If the markets move bearish it's my intention to leave the fund invested until a recovery takes place. Therefore, the investment timescale is somewhere between 5 and 12 years.

75% of the portfolio is currently invested in VLS 80 and I am now looking to invest the other 25% in 'global small caps'. The quotes are used as 'small cap' seems to be a relative term. The passive options seem to be Vanguard Global Small Cap (average company capitalisation in the billions, market weighted and so 50%+ in the USA, OCF 0.38%) or iShares MSCI World Small Cap UCITS ETF (ditto and ditto, OCF 0.35%).

Is this an area in which I would be best looking at an actively managed fund? Something like Standard Life Investments Global Smaller Companies ? Much higher OCF (1.06% ouch!) but it has outperformed Vanguard to a reasonable degree during this bull run.

I appreciate that I will be increasing the risk and volatility of the portfolio by adding Small Caps into the mix but, given the flexible timescale, think that the extra risk is worth the potential reward.

None of the above have a track record that covers the financial crisis so I have no idea how they could/would perform in a bear market. I appreciate that they will fall further than large caps.

Your investment recommendations would be much appreciated. I realise it's a small investment so I may be over-analysing this and should, perhaps, just stick to one of the passives mentioned above.

AnotherJoe · 10 August 2018 at 10:17PM

DairyQueen wrote: »

I manage a 'pocket money portfolio' on behalf of my nephews (ages nearly 13 and just turned 11),

I add £50 monthly to an HL ISA (in my father's name - he never uses his ISA allowance) and invest the new cash around every 18 months.
.

Any reason you arent investing it each month ?

jamiex · 10 August 2018 at 10:36PM

There aren't too many options when choosing a global small-cap fund and those you've mentioned already would be good candidates.

A couple of others spring to mind:
Invesco Perpetual Global Smaller Companies
McInroy & Wood Smaller Companies

If you're looking for an investment trust you could also consider F&C Global Smaller Companies PLC

I think most of the funds do invest in mid-sized rather than small companies due to liquidity.

There are also lots of UK specific smaller company funds if you wanted to increase your weighting towards the UK.

Morphoton · 10 August 2018 at 11:54PM

With regard to the F&C Global Smaller Cos IT (FCS):
According to HL it has an OCF of 0.59%.
https://www.hl.co.uk/shares/shares-search-results/f/f-and-c-global-smaller-companies-it-ord-25p

With regard to long term performance, each of the last 12 years annual reports can be downloaded from:
https://www.fandc.com/uk/private-investors/investment-trusts/global-trusts/fandc-global-smaller-companies/documents/
By using the 10Y data on p54 of the 2007 report you can see high/low share price in each year 1997-2007.
By using the 10Y data on p78 of the 2017 report you can see high/low share price in each year 2007-2017 which gives you 20 years of data in total.

DairyQueen · 11 August 2018 at 9:00AM

AnotherJoe wrote: »

Any reason you arent investing it each month ?

Dealing charges on non-fund investments. I don't want charges to limit investment choice. Plus the monthly amounts are small and it's easier to invest/rebalance approx every 18 months.

I could hold the cash outside the ISA until I'm ready to invest another chunk but, tbh, the overhead of doing this outweighs the small amount of interest.

I am currently reviewing the portfolio and the £2.5 is the proceeds of a sale plus a little new cash.

DairyQueen · 11 August 2018 at 9:24AM

Thanks for the recommendations. I'm not seeking to weigh toward the UK per se but allow more diversification from the US than is possible with the trackers.

Small Caps are one investment area which seem better suited to active management. Ideally I would like an investment which adopts a value perspective to picking stocks across the globe and isn't tied to holding x% in specific (currently highly valued) markets. I am prepared to hold the fund for a decade or more if necessary.

Linton · 11 August 2018 at 9:32AM

I would not buy a global small cap, especially a tracker:
1) I believe Small Cap benefits from local knowledg and so cannot see the advantage of a global small cap fund
2) Human intervention is needed to weed out the rubbish.
3) The small cap indexes include some very large companies
4) A small cap global tracker would be highly weighted towards the US where there appears to be minimal advantage of investing in small cap.
5) The UK Small Cap sector has been one of the best performing sectors across the whole market for the past 10 years. UK is a relatively small % of the world market.

So better in my view to buy separate UK, Europe, and Japan managed SC funds.

AnotherJoe · 11 August 2018 at 9:34AM

DairyQueen wrote: »

Dealing charges on non-fund investments. I don't want charges to limit investment choice. Plus the monthly amounts are small and it's easier to invest/rebalance approx every 18 months.

I could hold the cash outside the ISA until I'm ready to invest another chunk but, tbh, the overhead of doing this outweighs the small amount of interest.

I am currently reviewing the portfolio and the £2.5 is the proceeds of a sale plus a little new cash.

There are discounts on regular investments. If you are waiting 18 months then there's significant sum not invested (compared to the overall amount) which long term would make difference .
I doubt rebalancing funds when saving £50 a month, makes any difference at all.

Not sure what you mean by the overhead of saving outside, if you had a regular saver you could probably get 3-5% and then when the annual period on that expires (as they tend to) pay it into the chosen investment and restart a new regular saver.

A_T · 11 August 2018 at 10:19AM

Linton wrote: »

I would not buy a global small cap, especially a tracker:
1) I believe Small Cap benefits from local knowledg and so cannot see the advantage of a global small cap fund
2) Human intervention is needed to weed out the rubbish.
3) The small cap indexes include some very large companies
4) A small cap global tracker would be highly weighted towards the US where there appears to be minimal advantage of investing in small cap.
5) The UK Small Cap sector has been one of the best performing sectors across the whole market for the past 10 years. UK is a relatively small % of the world market.

So better in my view to buy separate UK, Europe, and Japan managed SC funds.

This. I used to hold Vanguard Global Small Cap but the more I looked into it the more I was convinced it would perform almost the same as a global large cap index tracker so it seemed pointless holding it.

Baillie Gifford Global Discovery is performing well but not really small cap.

AnotherJoe · 11 August 2018 at 10:35AM

Linton wrote: »

I would not buy a global small cap, especially a tracker:
1) I believe Small Cap benefits from local knowledge and so cannot see the advantage of a global small cap fund
2) Human intervention is needed to weed out the rubbish.
3) The small cap indexes include some very large companies
4) A small cap global tracker would be highly weighted towards the US where there appears to be minimal advantage of investing in small cap.
5) The UK Small Cap sector has been one of the best performing sectors across the whole market for the past 10 years. UK is a relatively small % of the world market.

So better in my view to buy separate UK, Europe, and Japan managed SC funds.

Agree with most of your points, except the first. With a global small fund, with active management as opposed to tracker global means they can pick anywhere, eg maybe small company X in the USA or Europe is better than Small Cap Y in the UK , but if you've bought a UK small cap the fund doesnt have the choice to buy X.

Linton · 11 August 2018 at 12:01PM

AnotherJoe wrote: »

Agree with most of your points, except the first. With a global small fund, with active management as opposed to tracker global means they can pick anywhere, eg maybe small company X in the USA or Europe is better than Small Cap Y in the UK , but if you've bought a UK small cap the fund doesnt have the choice to buy X.

Yes but I have my doubts whether one fund can really keep its eye on a large number of small companies spread across the world. That is why I am advocating separate specialised funds for each of the main markets except the US where I have not found any great advantage of small cap funds over the total market, perhaps because some of the largest companies in the US have achieved the sort of high growth one only usually finds in small companies.

Which Global 'Small Cap'?

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