Over the long term smaller companies have tended to perform better than their larger counterparts, although they are higher risk and more volatile. Recent performance has been more subdued. For the past year global economic activity has been slowing which is not a positive operating environment for smaller companies.
However, the outlook is improving and economic growth could be expected to rise over the coming year, according to Harry Nimmo and Alan Rowsell, managers of the Standard Life Investments Global Smaller Companies Fund. Against this backdrop, they expect smaller companies to perform well.
The managers prefer to invest in businesses with the ability to grow organically over those which grow through the acquisition of other firms. They seek companies with high-quality business models, strong cash flows and recurring revenues.
Harry Nimmo and Alan Rowsell are currently finding companies with these characteristics in the healthcare and financial sectors. Over the past six months, exposure to these areas has been increasing. Within the healthcare sector they are particularly positive on BTG, a growing UK biopharmaceutical company with a breakthrough varicose vein product, and US dental firm Align Technology.
The increased financial sector exposure has been partly due to the purchase of shares in Paragon, a UK challenger bank. Paragon is expanding its product offering in buy-to-let mortgages and consumer products, while large high street banks have less cash to invest in growth due to increased capital requirements.
Performance of the Standard Life Global Smaller Companies over three years
Past performance is not a guide to future returns. * Lipper to 01/05/15
|Annual percentage growth|
| May 12 -
| May 13 -
| May 14 -
|Standard Life Global Smaller Companies||17.9%||6.0%||16.8%|
Full year performance figures before this date are unavailable
Our view on this fund
Following a promising start the fund has struggled to keep pace with the peer group over the past year, particularly between mid-March 2014 and August 2014. Despite this the fund has outperformed the IA Global sector by 6.5%* since its launch in January 2012, returning 54.3%, but please remember past performance is not a guide to future returns and this is only over a relatively short time period. Our analysis suggests the fund's returns are mainly down to the managers' stock selection. The fund operates a concentrated portfolio which enables each holding to make a significant impact, on returns although this is a higher-risk strategy. Its global mandate allows the managers access to a wider range of opportunities than exist in the UK, including those in higher-risk emerging markets. We remain confident in the managers' ability to add value over the long term and the fund retains its place on the Wealth 150 list of our favourite funds across the major sectors.