Smaller companies account for around 70%* of all listed companies and offer a wealth of choice to investors. Relative to larger peers, they typically provide exposure to:
- companies that generate a higher proportion of revenues from local markets
- an alternative set of risks
- companies with the potential to grow rapidly.
These distinct features provide strong diversification benefit potential when added to a large-cap equity portfolio.
Risk and return are two sides of the same coin. The higher risk associated with smaller companies accounts for the return premium that long-term investors have received. A dollar invested in US large-caps in 1926, with dividends reinvested, grew to $5,767 by end-2017. A similar investment in small-caps grew to $38,842 – over six times more. This return premium is a global phenomenon. Smaller companies have outpaced their larger peers by an average of of 4.9% per annum since 2000**. This occurred across the world’s largest equity markets.
Smaller companies also tend to attract less analyst coverage than their larger peers. This means there may be greater and more frequent discrepancies between their fundamentals and their market valuations. This creates a rich environment for fundamental, active stock-pickers such as ourselves.
At ASI, we offer a comprehensive suite of small-cap equity strategies. We believe stock-specific insights drive returns. As active investors, we therefore build our portfolios from the bottom up. This research-intensive process gives our clients direct access to our best small-cap investment ideas.
*Number of smaller companies is a percentage of total companies listed on MSCI ACWI and MSCI ACWI Small Cap.
** Source: Thomson Reuters Datastream, performance in USD, 01/01/2000-31/12/2018
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A history of outperformance
Small-caps have outperformed larger peers across most timeframes and most geographies. From 1 January 2000 to 31 December 2018, global small-caps delivered a positive cumulative return of 362%. This compares to a 139% return for the MSCI All Country World Index.
A rich investment universe for active managers to add value
As defined by MSCI, on a global basis, around 70% of the world’s listed companies are small-caps. This provides a rich and varied investment pool for active investors to uncover the larger cap leaders of tomorrow. Additionally – relative to large caps – small caps have greater dispersion in returns and less analyst coverage; further reasons why we believe skilled active management may add significant value over the long term.
Smaller companies offer diversification benefits as part of a wider portfolio. They can provide different sources of returns to larger caps. Small-caps tend to be more domestically focused than their bigger, international rivals. Investors can therefore gain direct access to expanding local economies or sectors. Small-caps are also potentially less vulnerable to global trends and currency fluctuations.
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