Conal Gregory: Sizing up the field for the best potential

IDENTIFYING the financial oaks of the future can be a great way to build up a money pot. When such enterprises are still acorns, they can be purchased inexpensively.

Some will fail and the growth may be sporadic. On the other hand, the successful ones can show spectacular results but it requires good research, insight and regular reviews to achieve top returns.

"I'm fairly bullish over investing in small caps," says Michael Stokes of Michael Stokes Financial Planning in Edinburgh, adding that he recommends phasing in money rather than making one lump sum decision. He tips Old Mutual UK Select Smaller Companies Fund.

Hide Ad
Hide Ad

Smaller shares tend to be more volatile than either mid or large cap shares, so regular savings, monthly or quarterly, makes sense.

"This is one area where an active fund manager can add value over and above simply tracking an index," says Iain Wishart of Wishart Wealth Management. "As smaller funds are less well researched, then the fund manager can sniff out a bargain."

Wishart tends to limit client exposure up to 10 per cent of their portfolio in smaller stocks as they are often riskier than larger shares. In the UK, he is currently recommending BlackRock, Invesco Perpetual, Investec, Old Mutual, Ignis and Standard Life.

Be careful to select the right Invesco UK smaller companies fund. Its equity fund, managed by Richard Smith, has attracted 325m and shows 57 per cent and 97.9 per cent growth over five and 10 years. However, the so-called growth fund, managed by Andy Crossley with 82.8m, has lost 14.4 per cent and 11.1 per cent over the same periods.

"Liquidity issues should always be a consideration when investing in small caps," warns Alistair Blyth of AB1 Financial Planning in Edinburgh. In the UK smaller companies funds, he particularly likes those offered by Aegon, Investec, M&G and Standard Life.

Most of the small cap investment recommended by Max Horne of Dunfermline-based Max Horne Group is executed through multi-asset portfolios with Frontier Capital.

However, he says: "If we want to add a bit of spice to a client's portfolio, we use three funds, two of which are passively managed using Dimensional's European and UK Small Companies funds. The only active fund consistently used is Standard Life's UK Smaller Companies which, although having a higher expense ratio, is a well-managed fund which consistently beats the benchmark for its sector."

Looking at continental Europe, there have been some spectacular success stories. Over five years, Threadneedle jumped 102.5 per cent, Baillie Gifford rose 94 per cent, and Scottish Widows Pan European increased by 83 per cent, according to Lipper research for The Scotsman.

Hide Ad
Hide Ad

Among small to mid cap funds over the same period, Franklin European saw growth of 127.5 per cent.

Further afield, both Blyth and Wishart like Threadneedle American Smaller Companies Fund, and Blyth also currently tips M&G's Japan Smaller Companies.

Another approach is to look at institutional tracker funds, which seek to replicate an index as closely as possible. Wishart likes those offered by Legal & General as well as using exchange traded funds (ETF).

He says: "These can track smaller cap markets at a fraction of the cost of actively-managed funds. Low cost passive funds like these can help keep the active fund manager honest and gives clients a benchmark with which to judge an active fund manager."

ETFs can be traded on the stock market in the same way as shares. They are a cost-efficient way to invest with no initial or exit fees and typical annual management charge of less than one per cent. However, check the currency used by the ETF as you may be exposed to currency volatility if it is not in sterling.

There are also smaller company funds which invest internationally. Achieving 92.4 per cent growth over five years and 114 per cent rise over ten years, the Invesco Perpetual Global Smaller Companies is definitely one to watch.

It has been running over 25 years and manager Bob Yerbury has 255m assets. It is spread mainly in the US (20.6 per cent), UK (17.1 per cent), Japan (13.5 per cent) and France (5.5 per cent).

Related topics: