Invest in overlooked growth via ASI Global Smaller Companies

The arrival of a coronavirus vaccine has triggered a fresh clamour for 'risk' assets. Having been fearful for much of the year, investors are perhaps getting greedy once again. Whether this strong performance holds up in the coming months is yet to be seen, but one thing holds true: riskier equities can boost returns in the longer run, as well as provide some diversification from more defensive assets. Smaller companies are a case in question, but their risks mean that investing in them requires a rigorous process.

A fund focused on this space that has fared well due to a rigorous investment process is ASI Global Smaller Companies (GB00BBX46522). Its managers, small-cap stalwart Harry Nimmo and Kirsty Desson, run a fairly concentrated portfolio with an eye to strong growth over a five-year period.

They use a screening tool to identify stocks from around the world with the best growth prospects. The screen seeks to reduce a universe of more than 6,000 global smaller company stocks to a more manageable selection by tracking 13 factors, including quality, earnings growth, momentum and valuation – as well as using back-testing to predict share price performance. Each company is given a total score and the fund's managers consider some of the higher-scoring names. They then carry out further analysis of potential holdings, which includes a large number of meetings with company management teams each year.

The screening tool helps to identify overlooked stocks, giving the fund's managers an important edge in their search for “under-researched, relatively undiscovered disruptors and innovators in line to become leading companies in the future”. Last year they noted that Shenzhou International (HK:2313), a producer of dyes, finishes, knitwear and prints for companies such as Nike (US:NKE) and Adidas (GER:ADIDAS), had become the first holding to return 1,000 per cent, having been added to the fund in January 2012. Mr Nimmo and his team noted that they “simply would not have known” about the company without the screening process.

ASI Global Smaller Companies also stands out because of the discipline around its process and defensive characteristics. The fund is monitored by a specialist team that provides a monthly risk report on its portfolio. The fund also has a bias to growth sectors, keeping it away from especially cyclical industries such as commodities producers, which can be more volatile.

The pedigree of the management team is also strong. Alan Rowsell left Aberdeen Standard Investments earlier this year, having run the fund since its 2012 inception, but veteran smaller companies investor Harry Nimmo has returned as a co-manager on the fund. He held this position at the time of the fund’s launch.

The fund had just 44 holdings at the end of October, but is diversified by geography and sector. Nearly half of the fund’s assets were in the US, with 12 per cent in Japan, 11.6 per cent in the UK and 7.1 per cent in Taiwan. The fund’s biggest positions included back-up power generator business Generac (US:GNRC), Japanese merger and acquisition specialist Nihon M&A Center (JAP:2127) and US online education company Chegg (US:CHGG).

Smaller companies are considered to be higher risk because they can be more volatile and at risk of bankruptcy in difficult economic times than their larger peers. ASI Global Smaller Companies' positioning means that in certain scenarios, such as a commodity rally, it could lag some parts of the market. And the fund's composition can deviate significantly from MSCI AC World SmallCap index, so you should also expect its performance to differ notably.

However, while smaller companies can experience volatility in the short term, they can form a valuable part of your portfolio over the longer term. And ASI Global Smaller Companies is run by an experienced team with a good record of picking out smaller companies that deliver stronger returns over such time periods. So if you are looking for diversified growth over the long term and can tolerate volatility along the way, ASI Global Smaller Companies looks like a good way to get it. Buy. DB