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  • FIRST POST
    • DairyQueen
    • By DairyQueen 10th Aug 18, 9:23 PM
    • 580Posts
    • 958Thanks
    DairyQueen
    Which Global 'Small Cap'?
    • #1
    • 10th Aug 18, 9:23 PM
    Which Global 'Small Cap'? 10th Aug 18 at 9:23 PM
    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.
Page 1
    • AnotherJoe
    • By AnotherJoe 10th Aug 18, 10:17 PM
    • 11,851 Posts
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    AnotherJoe
    • #2
    • 10th Aug 18, 10:17 PM
    • #2
    • 10th Aug 18, 10:17 PM
    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.
    .
    Originally posted by DairyQueen

    Any reason you arent investing it each month ?
    • jamiex
    • By jamiex 10th Aug 18, 10:36 PM
    • 192 Posts
    • 106 Thanks
    jamiex
    • #3
    • 10th Aug 18, 10:36 PM
    • #3
    • 10th Aug 18, 10:36 PM
    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
    • By Morphoton 10th Aug 18, 11:54 PM
    • 88 Posts
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    Morphoton
    • #4
    • 10th Aug 18, 11:54 PM
    • #4
    • 10th Aug 18, 11:54 PM
    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
    • By DairyQueen 11th Aug 18, 9:00 AM
    • 580 Posts
    • 958 Thanks
    DairyQueen
    • #5
    • 11th Aug 18, 9:00 AM
    • #5
    • 11th Aug 18, 9:00 AM
    Any reason you arent investing it each month ?
    Originally posted by AnotherJoe
    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
    • By DairyQueen 11th Aug 18, 9:24 AM
    • 580 Posts
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    DairyQueen
    • #6
    • 11th Aug 18, 9:24 AM
    • #6
    • 11th Aug 18, 9:24 AM
    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
    • By Linton 11th Aug 18, 9:32 AM
    • 10,082 Posts
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    Linton
    • #7
    • 11th Aug 18, 9:32 AM
    • #7
    • 11th Aug 18, 9:32 AM
    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
    • By AnotherJoe 11th Aug 18, 9:34 AM
    • 11,851 Posts
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    AnotherJoe
    • #8
    • 11th Aug 18, 9:34 AM
    • #8
    • 11th Aug 18, 9:34 AM
    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.
    Originally posted by DairyQueen
    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.
    Last edited by AnotherJoe; 11-08-2018 at 10:30 AM. Reason: idiotic typos
    • A_T
    • By A_T 11th Aug 18, 10:19 AM
    • 567 Posts
    • 393 Thanks
    A_T
    • #9
    • 11th Aug 18, 10:19 AM
    • #9
    • 11th Aug 18, 10:19 AM
    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.
    Originally posted by Linton
    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
    • By AnotherJoe 11th Aug 18, 10:35 AM
    • 11,851 Posts
    • 13,824 Thanks
    AnotherJoe
    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.
    Originally posted by Linton

    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
    • By Linton 11th Aug 18, 12:01 PM
    • 10,082 Posts
    • 10,415 Thanks
    Linton
    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.
    Originally posted by AnotherJoe

    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.
    • DairyQueen
    • By DairyQueen 11th Aug 18, 12:26 PM
    • 580 Posts
    • 958 Thanks
    DairyQueen
    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.
    Originally posted by AnotherJoe
    Yep, the cash on account builds to around 700/900 until invested. However, I am not seeking to optimise the returns. It's a balance between time required to manage it versus reasonable return. This is bunce money for my nephews so if I miss the full benefit of pound/cost averaging then so be it. It's intended as a gift and is not required to secure their futures (that's their parents' job).

    Reviewing/rebalancing has made a difference as I opened this ISA as a very inexperienced investor several years ago. I was lucky with the timing of the mish-mash of investments I have picked over the years. It's a learning experience and as I gained more knowledge/confidence I have periodically rebalanced the portfolio to a) diversify and b) remove much of the very high volatility/risk. The annual requirement to invest new cash has been the catalyst for review.

    Reviewing/rebalancing has been necessary in order to correct my many, potentially disastrous, mistakes.

    Spouse, parents and I are all maxed-out on regular savers (we exploit these for our own cash). I used to hold the funds in a Children's Regular Saver in each nephew's name (me as trustee). The hassle required to act as trustee on a child's a/c (unless you are the parent) has to be experienced to be believed.

    Halifax eventually required me to produce the children's birth certificates, my own birth certificate (plus evidence of name change), plus proof of address and passport, in person, to access matured funds or open new accounts. That was the final straw. I had been operating Halifax child saver accounts for three years at the time. Dealing with Money Laundering law became far too onerous to contemplate keeping any savings in their names.

    Other than regular savers, the max interest available on cash has been in the region of 1-2%. That equates to around 3-6 in interest on 50 saved monthly over 12 months. I'm not losing any sleep over foregoing that.

    Now I only spend a a day or two each year managing this portfolio and each time I apply knowledge and experience acquired over the previous year.

    The children have benefited from all of the research required to DIY our SIPPs. I'm no expert but I now feel comfortable with investment basics. No surprises that the children's portfolio will consist of only two investments this year.
    • DairyQueen
    • By DairyQueen 11th Aug 18, 1:29 PM
    • 580 Posts
    • 958 Thanks
    DairyQueen
    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.
    Originally posted by Linton
    Thanks for the summary. I had considered the US's position in this kind of fund but was not aware of the outperformance of the UK over the entire decade.

    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.
    Originally posted by AnotherJoe
    This is one of the issues I have been considering. UK small caps may not perform so well over the next 10 years and I would prefer a fund that has a wider regional scope.

    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.
    Originally posted by Linton
    A first look at some of the options suggest that most funds don't attempt to cover the whole globe. There is a general bias toward the US, UK and Japan, plus each appears to focus on a limited number of (usually developed) markets in addition to those.

    I take your point on funds that focus on specific markets but, given that this is a small portfolio, I may trade the potential for higher performance against simplicity. It's probably no coincidence that the actively managed, global small caps heading the performance tables over the last 1/3/5 years are all heavily exposed to the US. Am I right in thinking that the size (relatively large) of US companies held by these funds, plus the general outperformance of the US market, are responsible ?

    Back to the drawing board. I think I need to examine the regional allocation and specific holdings of any contenders.
    • DairyQueen
    • By DairyQueen 11th Aug 18, 2:14 PM
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    DairyQueen
    Baillie Gifford Global Discovery is performing well but not really small cap.
    Originally posted by A_T
    Ha! Coincidently, I spotted this one (and a few others) on citywire this a.m. It's off the scale in risk/volatility and also has almost 60% allocated to the US. Plus 65% allocated to Technology and Healthcare. I haven't yet checked the holdings but it's outperformance suggests that the manager has been riding on a US 'large cap' crest and popularity of specific sectors. Just speculating at the moment though.
    • AnotherJoe
    • By AnotherJoe 11th Aug 18, 7:33 PM
    • 11,851 Posts
    • 13,824 Thanks
    AnotherJoe
    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.
    Originally posted by Linton
    Good point.
    • darkidoe
    • By darkidoe 11th Aug 18, 10:21 PM
    • 973 Posts
    • 1,130 Thanks
    darkidoe
    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.
    Originally posted by Linton
    Just wondering what percentage of your portfolio do you tend to allocate your for small cap funds?

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    • Morphoton
    • By Morphoton 12th Aug 18, 1:26 PM
    • 88 Posts
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    Morphoton
    Just wondering what percentage of your portfolio do you tend to allocate your for small cap funds?
    There was a discussion on this very point earlier in the year:
    Smaller companies within a wider portfolio:
    https://forums.moneysavingexpert.com/showthread.php?t=5769409
    • TBC15
    • By TBC15 12th Aug 18, 3:54 PM
    • 671 Posts
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    TBC15
    Is there anything ethically/legally wrong with third party's using an ISA allowance?
    • DairyQueen
    • By DairyQueen 13th Aug 18, 1:41 AM
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    DairyQueen
    Is there anything ethically/legally wrong with third party's using an ISA allowance?
    Originally posted by TBC15
    Children's JISA and personal allowances aren't used so using dad's (otherwise unused) ISA allowance has a net zero impact on tax. If I was filling the children's JISAs and then using dad's to hold the surplus then, yep, unethical, but I only use dad's name on the label to keep the proceeds from being frittered by 18-year-olds.

    Don't know about you but I had about as much financial sense as a caterpillar at age 18 and my nephews show no sign of breaking with family tradition.
    • DairyQueen
    • By DairyQueen 13th Aug 18, 2:30 AM
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    • 958 Thanks
    DairyQueen
    Having looked into the sector a little more I'm coming round to Linton's way of thinking.

    Trackers are definitely out of the picture but I am leery about the high US allocation in most managed offerings. Few funds in the sector have a 10+ year track record so assessing performance over more than 5 years isn't possible.

    Baillie Gifford is high risk and volatile, and its outperformance in the sector coincides with the rise in the US markets. It is 60% invested in the US and the holdings are large cap by most market standards.

    Two have longer track records. McInroy & Wood and F&C.

    I smiled when I saw the inception date for the latter - 1889. Given that it has returned an average 15%p.a. since inception, that's a pretty impressive record. It also has a divi of close on 1% and proudly proclaims that the divi has been increased for the last 48 years. The OCF is high at 1.07% and, interestingly, 7 of the top 10 holdings are Asian collectives. They outsource stock-picking in the Asian markets. They also use an odd benchmark combination - 30% Numis UK Small Companies and 70% MSCI All Country ex UK Small Cap. However, their current UK allocation is 24% so I'm not sure how performance can be accurately compared to their benchmark or even if its worth comparing. Also there is stamp duty and trading costs to pay.

    The best of the bunch so far seems to be McInroy and Wood. An 18-year, reasonable track record and much less US orientated than the others. Problem is that it doesn't appear to be available to retail investors.

    I think I will follow Linton's advice and pick three regional funds, plus add another 500 to VLS. The allocation will then be:

    80% VLS80
    10% UK Small Cap
    5% European Small Cap
    5% Asia Small Cap

    More research and management but it's all part of the learning experience.
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