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Diversify your growth with F&C Global Smaller Companies

F&C Global Smaller Companies looks like a good way to get globally diversified growth
March 22, 2018

If you are looking for growth some exposure to smaller companies could give your portfolio an added boost. However, smaller companies typically have higher exposure to the economy of the country where they are listed, so with Brexit on the horizon and uncertainty over UK economic prospects, substantial exposure to UK smaller companies may not be a good option.

IC TIP: Buy at 1310p
Tip style
Growth
Risk rating
High
Timescale
Long Term
Bull points

Good performance

Discount to NAV

Diversified smaller company exposure

Risk mitigation

Bear points

Volatility

So a good solution could be F&C Global Smaller Companies (FCS). This investment trust has around three-quarters of its assets in overseas smaller companies, diluting UK risk. And now could be a good time to buy this trust as it was trading on a discount to net asset value (NAV) of 4 per cent (as of 19 March), in contrast to the premium it has often traded at in the past few years.

The trust has a good record of outperforming benchmarks such as MSCI World Small Cap index, which it also beat during 2017. However, it slightly lagged this index in 2016, so its medium-term cumulative numbers don't look as strong, although over one year it is ahead. If the good performance continues the discount could tighten again and possibly return to a premium.

The trust aims for a high total return by investing in other funds to get exposure to Asian and emerging markets, and directly in shares for exposure to the US, UK and Europe, some of which might not be easily accessible to private investors in the UK. Its largest geographic exposure is the US, at about 38 per cent of assets, while Europe ex UK accounts for about 12.5 per cent and Japan 9 per cent. So it is a way to get diversified exposure to smaller companies via one holding, rather than having to hold a number of regional funds.

"This trust is a good way of gaining exposure to a specialised segment of the market on a global basis," says Iain Scouller, managing director of investment funds research at broker Stifel. "This trust is a one-stop shop for exposure to small/mid-cap growth companies, with investments in over 20 markets. [Manager] Peter Ewins and his team have built up a consistently strong track record. We maintain a positive recommendation, given the good long-term record, attractive spread of geographies and diversified company access."

Mr Ewins and his team aim to invest in high-quality companies at attractive prices, which offer the potential to deliver strong returns, with an eye to minimising risk.They try to reduce the higher levels of volatility associated with smaller companies by doing detailed analysis, and investing in a large number of stocks in various industry sectors and geographic areas. At the end of January the trust has 182 holdings. However, it has no specific sector or geographic exposure limits.

When selecting direct shareholdings, its investment team meet companies and assess the quality of their managements, positions in their targeted markets and strategies for growth. They examine companies' financial strength and cash flow dynamics, because smaller companies tend to have fewer funding options than larger companies.

Although not a high-yielder the trust's dividend has risen for 47 consecutive years.

Smaller companies are typically higher risk than their larger counterparts. They are not as diversified and can be more dependent on a limited number of key personnel. And smaller companies may find it more difficult to access finance, particularly in times of recession. This means that their share prices can be more volatile.

F&C Global Smaller Companies also has about a quarter of its assets in the UK, so could incur some overlap if you already have exposure to this area.

However, if you have a long-term investment horizon and can ride out volatility, smaller companies have delivered strong growth over the long term. And as this is an actively managed fund its experienced managers selectively pick ones that seem financially stronger, with a view to minimising risk and volatility. And their approach has resulted in good returns in most years.

So if you want the potential for strong growth and globally diversified exposure to smaller companies, including those in the UK, F&C Global Smaller Companies looks like a good way to get this, especially when it is on a discount to NAV. Buy. LW

 

F&C GLOBAL SMALLER COMPANIES (FCS)

PRICE1310pGEARING6%
AIC SECTOR GlobalNAV1364.61p
FUND TYPEInvestment trustPRICE DISCOUNT TO NAV4%
MARKET CAP£783mYIELD1.00%
No OF HOLDINGS182*ONGOING CHARGE0.84%**
SET UP DATE15 Feb 1889*MORE DETAILSfandc.co.uk

Source:Winterflood as at 19 March 2018 *Morningstar **F&C Investments

 

Performance

Trust/benchmark1 year total return (%)3 year cumulative total return (%)5 year cumulative total return (%)
F&C Global Smaller Companies share price33680
F&C Global Smaller Companies NAV104588
MSCI World Small Companies index64586

Source: Winterflood Securities as at 19 March 2018

 

Top 10 holdings as at  28.02.2018 (%)

Eastspring Investments Japan Smaller Companies5.3
Aberdeen Global Japanese Smaller Companies4.1
Pinebridge Asia ex Japan Small Cap Equity3.1
Scottish Oriental Smaller Cos Inv Trust2.8
Utilico Emerging Markets2.1
Manulife Global Asian Smaller Companies1.9
HSBC GIF Asia ex Japan Equity Smaller Companies1.5
Alleghany1.2
Steris1.1
State Bank Financial Corp1

Source: F&C Investments

 

Geographic breakdown as at  28.02.2018 (%)

North America38.4
UK26.7
Continental Europe12.6
Rest of World12.5
Japan9.4
Cash and fixed interest0.4

Source: F&C Investments