The Search For Global Small-Cap Funds

Let’s start small in 2019. One of my investing ‘themes’ at the moment is to dedicate a slice of my portfolio (roughly 10% or so) to smaller company investments. I feel that I’m pretty well covered UK-wise, so the next stop is global small-cap funds.

Why smaller companies though? To eke out a little more performance from the ‘small-cap effect‘.

In a previous piece, I looked at the riches on offer when it comes to UK smaller company funds. But if we are looking further afield, the pickings seem a lot slimmer.

There are quite a few investment trusts that do specialise in small caps outside of the UK. For the most part, however, they also focus on a particular region as well.

You could argue that makes some sense. Smaller companies are usually focused on their domestic markets, so a little specialised knowledge about a particular economy or region might give you a bit of an edge.

But you’re getting pretty niche when you pick such funds. And if you are splitting your overall small-cap allocation among a few different funds, as I am, you could end up with a number of tiny positions that are a bit of a pain to keep on top of.

Personally, therefore, I’d favour funds covering this sector globally. But that seems to be a bit of a problem…

Global small-cap funds

Here are all the global small-cap funds along with funds that focus on small caps in a specific region:

Investment trust	Ticker	Launched	Assets (£m)	Discount (%)	Gearing (%)	NAV 1yr (%)	NAV 10yr (%)	Div yld
GLOBAL
Marwyn Value Investors	MVI	Feb-06	143	-41	0	-3	210	6.9%
Oryx Int’l Growth	OIG	Mar-95	132	-15	0	2	433
ScotGems	SGEM	Jun-17	50	-0	0	-3
Smithson	SSON	Oct-18	831	3	0
Edinburgh Worldwide	EWI	Jul-98	485	-3	8	3	335
BMO Global Smaller	BGSC	1889	788	-3	2	-7	317	1.2%
NORTH AMERICA
JPMorgan US Smaller	JUSC	Jan-82	178	-2	4	-3	432	0.9%
Jupiter US Smaller	JUS	Mar-93	158	-7	2	5	268
North Atlantic Smaller	NAS	Jan-73	540	-23	0	4	278
JAPAN & ASIA
AVI Japan Opportunity	AJOT	Oct-18	77	5	0
Atlantis Japan Growth	AJG	May-96	105	-9	7	-15	193
Baillie Gifford Shin Nippon	BGS	Jul-85	447	5	0	-3	577
JPMorgan Japan Smaller	JPS	Apr-84	221	-11	0	-18	147	5.1%
Scottish Oriental Smaller	SST	Mar-95	325	-11	0	-8	402	1.2%
EUROPE
European Assets	EAT	Oct-83	391	-8	1	-14	304	8.2%
JPMorgan European Smaller	JESC	Apr-90	679	-13	1	-13	260	1.9%
Montanaro European Smaller	MTE	Sep-06	166	-11	0	0	305	1.0%
TR European Growth	TRG	Sep-90	531	-11	12	-22	294	2.2%

Sector confusion

As is often the case, the AIC sector groupings can lead you a little astray when you are looking for specific types of fund.

Thanks to Steve in the comments section who pointed out that I missed both Edinburgh Worldwide and BMO Global Smaller Companies in the initial version of this article. They are classified as Global funds rather than Global Smaller Companies.

Scottish Oriental is another sector nomad, sitting within Asia Pacific excluding Japan, rather than in a specific smaller company sub-sector.

I’ve now added all three to the table above. There may be a few others like this that I have missed out as well.

What stands out?

A few of my usual pithy observations…

Most global small-cap funds have a decent track record of at least a decade, but there is only one really old trust on offer here: BMO Global Smaller.

In terms of fund manager tenure, the longest-serving appear to be Atlantis Japan (22 years), JPMorgan European (20), Jupiter US Smaller (18), and Marwyn & BMO Global Smaller (both 13).

2018 saw the launch of a number of equity funds, and this area was no exception with AVI Japan Opportunity and Smithson joining the fray. Scotgems is another recent addition.

When it comes to yield it seems to be a case of feast or famine. They are three very high-yielders on offer, although it’s worth noting that European Assets has a policy of paying out 6% of its year-end net asset value so its 2019 dividends will be a lot lower.

Gearing isn’t much of a factor for these funds, although it looks like TR European Growth’s decision to borrow magnified its losses in 2018. I held this fund in the 1990s and early 2000s and still have a little bit a soft spot for it.

Discounts vary quite a lot, though, with two of the newer funds at small premiums, along with the top-performing Japanese fund from Baillie Gifford. Most of the other funds are gathered around the 10% discount level that often seems to be quoted as the norm for smaller company investment trusts.

Marwyn’s discount woes

Marwyn is the stand out in terms of discount, with its shares a massive 41% below their net asset value. And its discount level has regularly been in the order of 20-30% over the last decade.

In fact, it’s more of a concentrated private equity fund, having just 6 investments with 40% in its largest holding (BCA Marketplace). Marwyn typically injects fresh funds and fresh management into situations where it can expand rapidly by acquiring new businesses.

It’s an interesting idea, but not really what I have in mind when I think of a global small-cap fund. There have been some governance concerns over the years as well it would appear.

What about performance?

There’s always a risk that you’re looking at just the survivors with these tables, and ignoring funds that shut up shop. Even allowing for that, a decent proportion of the funds above produced respectable numbers over the last decade.

As we are comparing 10-year returns beginning with the depth of the financial crisis, when discounts widened dramatically, I think net asset value is a better yardstick than share price.

The MSCI World Small-Cap, which you can invest in via a Vanguard fund makes a good comparator. This index is up around 220% in dollar terms over the last decade, or some 260% in sterling.

Oryx, JPMorgan US Smaller, Scottish Oriental, and Baillie Gifford Shin Nippon have therefore been the standouts. Sticky gold stars for all!

Taken as a whole, the North American and European sectors have performed in a similar fashion, which is perhaps a little surprising. I would have guessed the former would have done a little better given the stellar run the US markets have had.

The performance data also shows what a difficult market Japan can be. Picking blindly a decade ago, you had a one in three chance of doing spectacularly and two in three of some fairly significant underperformance.

Elsewhere out East, the new AVI fund seems to have its admirers, but I haven’t looked at it in detail as it seeemed a bit niche for my purposes. Scottish Oriental has big weightings in India (28%) and Taiwan (11%) but specifically excludes Japan.

Narrowing down the choices

When it comes to pure global small-cap funds, we arguably just have five on offer: Smithson, Oryx, Edinburgh, BMO, and Scotgems.

The Smithson fundraising exceeded most expectations, but I’ve written a fair amount about it already, so there’s probably not much more to add here. I bought some when it launched and have since added a little more. I might take another nibble at some point this year, especially if the premium narrows.

There are two main things to note with Smithson, in addition to the lack of any track record.

First, it’s targetting mid-cap stocks rather than small caps (think several billion pounds rather than less than two), although I don’t consider that to be a deal breaker myself.

Second, the portfolio is only being overseen by Terry Smith rather than being run by him directly. Again, that’s something I’m comfortable with, although my position size with this one is likely to remain on the small side (no pun intended) for the time being.

Scotgems drags its feet

Smithson only took a couple of weeks to become fully invested – no small feat considering it raised in excess of £800m. Scotgems, on the other hand, only managed to invest 60% of the £50m it raised by September 2018, some 15 months after it launched.

It’s seeking a portfolio of 20-30 companies, and already has 22 positions, but seems to be waiting for more attractive valuations before deploying its remaining cash.

There’s been no update of any sort since mid-September, which is a bit rubbish in the circumstances. It doesn’t seem to publish any factsheets so investors only have twice-yearly result statements to assess how things are progressing.

I suspect the full-year results due in early March could reveal a fair chunk of the remaining cash has been spent.

That said, the heavy cash weighting has no doubt helped its performance in recent months, so perhaps I’m being unduly harsh here, as that slow deployment is looking pretty smart right now.

So far, it’s invested primarily in Asia and Africa, so I wouldn’t consider it a true global fund, despite the sector it’s been allocated to.

Oryx gallops ahead

Oryx is one of those low-key funds you don’t tend to read much about, but seem to do very well whenever you look at the best long-term performers. Rights & Issues arguably does much the same thing among UK smaller company funds.

It’s run by Harwood Capital, who also run North American Smaller Companies, the oldest international small-cap trust. Harwood is also a joint venture partner in Odyssean, an interesting UK small-cap fund launched last year. So they are very much small-cap specialists, although they were also behind the failed launch of Multifamily Housing REIT late last year.

The main problem? It’s mostly invested in the UK. Although the remit is to invest in North America as well, the last portfolio listing seems to indicate it’s 80% UK and 15% cash.

Well run, apparently so. Global, not so much.

The tech-heavy option

Edinburgh Worldwide, run by Baillie Gifford, is an interesting fund. It has a heavy tech focus, with the likes of Ocado, Zillow and Tesla among its largest holdings.

It’s recently reduced its management fee a little bit (always nice to see) and is looking to raise the proportion it can invest in unlisted companies from 5% to 15% now that Baillie Gifford has more specialist expertise in this field.

Edinburgh’s gearing has come down steadily over the last decade and after spending most of 2018 trading at a premium to net assets, it now seems to be at a discount again.

One I need to dig into a little deeper I think.

The sector veteran

BMO Global Smaller Companies, until recently known as F&C Global Smaller Companies, seems like perhaps the safest option among all the global small-cap funds. It has been around for well over a century and has 48 years of consecutive dividend increases (its yield is still quite low, however).

Somewhat unusually, around a fifth of its portfolio is invested in other small-cap funds. It also has a pretty high UK exposure for a global fund (around a quarter).

But if you are looking for a hands-off global small-cap investment, it certainly has some appeal.

More digging required

Ideally, I’d like to add a second global small-cap fund alongside my holding in Smithson, but no one fund is really leaping out at me right now.

Oryx seems too UK-focused and I’d like to see how Scotgems develops. BMO is a possible option, as is Edinburgh Worldwide. I actually quite like the idea of the two together — it feels like pitting the tortoise against the hare.

I haven’t entirely ruled out just going passive, with a global small-cap index tracker as a Smithson stablemate. It’s probably the simplest option.

One for me to ponder.

   

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Disclaimer

Please note that I may own some of the investments mentioned above -- you can see my current holdings on my portfolio page.

Nothing on this website should be regarded as a buy or sell recommendation as I'm just a random person writing a blog in his spare time and I am not authorised to give financial advice. Always do your own research and seek financial advice if necessary!

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