Smaller companies can punch above their weight and be some of the most exciting businesses around the globe. They’re also often under researched compared to bigger companies, and this creates opportunities for fund managers to find hidden gems.
Smaller companies have tended to outperform larger companies over the long term. They normally have greater potential for returns to investors given they tend to have more room to grow, but they can also be more volatile.
Larger companies on the other hand are typically more mature and might find it harder to grow at the same pace.
Remember, returns aren’t guaranteed and past performance isn’t a guide to the future.
This article isn’t personal advice. Investments can rise and fall in value, so you could get back less than you invest. If you’re not sure if an investment’s right for you, ask for financial advice.
Smaller vs bigger companies – who’s performed best?
More recently, smaller companies across the globe have been left behind by their larger counterparts.
One reason for this is smaller companies typically hold proportionally less cash than larger companies and can rely on bank loans to finance their future growth.
This makes them much more sensitive to interest rate changes, and has increased the cost of borrowing money as interest rates have risen around the world.
Some investors have therefore favoured larger, more mature companies where they might have more stable cashflows and be less reliant on borrowing for growth.
Stock market growth has also been boosted in recent years by a relatively small group of large companies.
In the US, for example, the ‘Magnificent Seven’ (Apple, Amazon, Google, Meta, Microsoft, Nvidia and Tesla) significantly outperformed the rest of the stock market by almost 10x.
On the other hand, the smaller companies index returned just over 10%.
Investors have rushed to these larger companies as they’re seen to be the key beneficiaries of advancements in artificial intelligence.
Five-year performance of global smaller companies
Is now the time to consider smaller companies?
The valuations of global smaller companies – a reflection of their future growth potential – are now well below their long-term averages and look attractive compared with larger companies.
This could spell opportunity for investors with a long-term outlook as at some point the valuation ‘gap’ could close. Smaller companies are also expected to grow their earnings faster in 2024, which could help share prices – of course, there are no guarantees though.
Furthermore, lower interest rates could benefit smaller companies as it reduces their borrowing costs. This could help when interest rates fall, though interest rates have remained higher for longer than many people expected.
We expect smaller companies to perform better at some point, as companies of different sizes, as well as different investment styles come in and out of favour. There are no guarantees of when, or if, this will happen though. Remember, smaller companies are higher risk because they have a greater chance of failure compared with more mature businesses. This means their share prices can experience more ups and downs.
4 smaller company fund ideas
Investing in these funds isn’t right for everyone. Investors should only invest if the fund’s objectives are aligned with their own, and there’s a specific need for the type of investment being made. Investors should understand the specific risks of a fund before they invest, and make sure any new investment forms part of a diversified portfolio.
For more details on each fund and its risks, use the links to their factsheets and key investor information.
abrdn global smaller companies
Kirsty Desson, the fund’s manager, and her team invest in under-the-radar smaller companies from around the world, outside the usual candidates of large companies that dominate stock markets.
They look in both developed and higher-risk emerging markets to find businesses they think are high-quality, growing and have momentum behind them.
This fund invests in relatively few companies. That means each one can have a greater impact on performance, although it's a higher-risk approach. The fund also has the flexibility to use derivatives, which could add risk.
Desson currently sees the best opportunities in the industrial sector where she invests close to 35% of the fund. She also invests close to 45% of the fund in the US however, this is lower than the benchmark.
Annual Performance Growth
31/05/2019 To 31/05/2020 | 31/05/2020 To 31/05/2021 | 31/05/2021 To 31/05/2022 | 31/05/2022 To 31/05/2023 | 31/05/2023 To 31/05/2024 | |
|---|---|---|---|---|---|
abrdn Global Smaller Companies Fund | 6.55% | 28.70% | -16.33% | -1.67% | 13.55% |
MSCI All Country World Small Cap | -1.01% | 38.22% | -1.10% | -2.01% | 16.14% |
Artemis US Smaller Companies
Artemis US Smaller Companies aims to deliver long-term growth by investing in smaller US businesses.
Fund manager Cormac Weldon has over 20 years of experience investing in the US and is supported by a strong team of company analysts. We like his disciplined approach to investing which leans towards growth orientated companies.
Weldon sees many quality smaller companies in the industrials sector where he invests close to a third of the fund.
This is a relatively concentrated fund investing in 50-70 companies out of the thousands that make up the benchmark, which can increase risk.
Annual performance growth
31/05/2019 To 31/05/2020 | 31/05/2020 To 31/05/2021 | 31/05/2021 To 31/05/2022 | 31/05/2022 To 31/05/2023 | 31/05/2023 To 31/05/2024 | |
|---|---|---|---|---|---|
Artemis US Smaller Companies | 11.34% | 37.09% | -11.11% | -7.53% | 28.73% |
IA North American Sm Companies | 5.60% | 36.84% | -7.04% | -1.29% | 15.86% |
Royal London UK Smaller Companies
Lead fund manager Henry Lowson has spent his entire investing career focused on analysing UK small and medium-sized companies. He and deputy manager Henry Burrell aim to deliver long-term growth by investing in some of the smallest companies in the UK stock market with plenty of growth potential.
We think the managers are well placed to pick out hidden gems in this under researched area of the market.
Growth is the overarching style of the fund, which means the managers focus on companies with long-term earnings growth potential. They also consider valuation meaning a company's share price should be lower than its future earnings suggest it should be.
Annual performance growth
31/05/2019 To 31/05/2020 | 31/05/2020 To 31/05/2021 | 31/05/2021 To 31/05/2022 | 31/05/2022 To 31/05/2023 | 31/05/2023 To 31/05/2024 | |
|---|---|---|---|---|---|
IA UK Smaller Companies | -6.98% | 53.78% | -14.92% | -13.07% | 14.45% |
Royal London UK Smaller Companies | -0.13% | 45.75% | -16.2% | -13.95% | 13.31% |
Barings Europe Select
This fund aims to boost long-term growth by focusing on small and medium-sized European companies.
Nick Williams is one of the few managers who has a long successful track record of investing in smaller European companies. He also has the support of co-managers Rosie Simmonds, Colin Riddles and William Cuss.
Williams and his team follow a GARP (Growth at a Reasonable Price) philosophy. This means they look for companies that grow their earnings consistently, but whose shares can be bought at a lower price than the earnings potential suggests they should be.
Annual performance growth
31/05/2019 To 31/05/2020 | 31/05/2020 To 31/05/2021 | 31/05/2021 To 31/05/2022 | 31/05/2022 To 31/05/2023 | 31/05/2023 To 31/05/2024 | |
|---|---|---|---|---|---|
Barings Europe Select J GBP | 4.07% | 30.07% | -11.36% | -2.60% | 11.65% |
MSCI Europe ex UK Small Cap TR GBP | 3.86% | 40.99% | -5.18% | -3.91% | 16.55% |