Closing Bell: In a global market, small may be risky but it's still beautiful

GLOBALISATION is nothing new– investment pundits have been talking about it since the mid-90s when the trade implications of the end of the Cold War became apparent.

The rise of the internet proved a dramatic force in localising the world. It smashed down many of the traditional barriers to entry that faced many established businesses, causing margin pressure and in certain cases entirely invalidating companies and even some sectors.

The credit crunch was another such wave and we are now dealing with the consequences of a range of events that, to most people, are difficult to explain. Why does tightening in the Chinese banking market affect us? What does the Greek bond market have to do with our long-term interest rates?

Such uncertainty is an additional risk that investors ten or 15 years ago didn't face. In this world, the convention is that big is beautiful, or at least theoretically safe and more sustainable.

For me this was the main reason that Cadbury, an icon in our part of the world, fell into the hands of Kraft.

You may wonder how smaller companies with aspirations survive or even thrive – these days, they're up against global as well as national competitors

Some 12 years ago I met a fund manager called Anthony Cross who left Schroders for a relatively new firm called Liontrust Asset Management. Cross focused on smaller company investment and recognised how the landscape was being reshaped by globalisation, and felt he needed to focus on a process that would identify more nimble and durable businesses that could thrive in such a challenging environment.

The process focused on the need for "economic advantage" in smaller companies. Economic advantage was defined as three attributes – intellectual property, distribution channels and repeat business – that were hard to replicate and that globalisation would find hard to invalidate, therefore allowing for high returns, greater dependability and long-term growth potential.

Where Cross could find these attributes together with an entrepreneurial spirit, he felt he had access to investments with genuine advantage.

The Liontrust Intellectual Capital Trust run by Cross has returned 219 per cent since January 1998 against 48 per cent for the FTSE small cap index and 55 per cent for the FTSE100. Notably it has coped well with downward market conditions, recovering almost all of the lost ground from the credit crunch to sit close to an all-time high. Of course you should bear in mind that past performance is no guide to the future.

What is surprising is that many of the funds' underlying holdings are quite modestly rated. They may be prone to greater earnings volatility than larger companies in general, but they have good growth prospects and are run with cash on the balance sheet – probably a benefit of the entrepreneurial focus.

Rising stars include Livingston-based software provider Craneware, UK Mail, and Fidessa, a provider of stockmarket pricing and software.

Such vibrancy in this field contrasts with the disappointment we feel when one of our larger, more established companies, like Royal Bank or Cadbury, fall victim to globalisation. Sterling's devaluation makes it cheaper for international and US operators to acquire these small companies at attractive currency rates, not to mention the valuation argument. This could give a short-term boost to a process that has much long-term potential. Small may be risky, but who said it isn't beautiful?

• John Moore is a divisional director at Brewin Dolphin.