After a long time out of favour, global smaller companies have started to perform well again. Choosing a fund to capitalise on this trend isn’t straightforward, however.
The MSCI World Small Cap index returned just 10 per cent in the three years to the start of 2025 – worse than all major indices other than emerging markets, as inflation and higher interest rates hit home. Absolute performance improved in 2024 and at the start of last year, but it wasn’t until the market bottom following President Donald Trump’s so-called “liberation day” that global small caps started to outperform.
The improved returns have gone hand in hand with a better time for the US small-cap index, the Russell 2000. As with the mainstream global index, small-cap benchmarks are dominated by US stocks: the MSCI small-cap index holds 60 per cent of assets in the region. This is 10 percentage points lower than the MSCI World’s own weighting, but still easily enough for what happens in the US to define how global small caps perform.
But the lower end of the cap scale (index median stock size: $1.5bn (£1.1bn)) isn’t dominated by technology stocks to the same degree as the upper echelons. The tech sector accounts for 11.5 per cent of the Small Cap index, less than half its weighting in the MSCI World. The slack is taken up by industrials, whose 20 per cent position is twice as large, as well as a greater weighting to the materials (largely mining) sector.
It’s true that the top slot in the smaller companies index is currently occupied by Sandisk (US:SNDK), the memory chipmaker whose shares have soared in the past six months as investors cotton on to the AI-induced increases in demand. Sandisk shares are up over 1,000 per cent since it spun off from Western Digital (US:WDC) a year ago, and 100 per cent in the past month. That has given it a market cap of $75bn; hardly smaller company territory.
But investors won’t be particularly exposed if the stock goes into reverse: at the start of January it still only accounted for 0.35 per cent of the World Small Cap index. The index spreads itself thinly across more than 3,000 stocks, and the top 10 account for less than 2.5 per cent of the total. That creates scope for active managers to outperform, albeit as usual this has proved easier said than done. Index trackers such as the iShares MSCI World Small Cap ETF (WLDS) or the Vanguard Global Small-Cap Index fund (IE00B3X1NT05) represent the most straightforward way to play this theme. Below, we profile some of the more notable active funds and investment trusts trying to do better still.
Open-ended funds
Assessing open-ended smaller companies funds’ relative merits takes a bit of effort because there is no dedicated grouping for them. Instead, they are lumped in with more than 500 other global equity funds, most of which will invest in large-cap stocks, in the Investment Association Global sector. There are roughly 30 funds focused on global smaller companies, several of which have launched in the past few years.
Asset managers, who often roll out products targeting sectors already at the crest of a wave, could perhaps be commended for being countercyclical here.
One standout performer in the sector, the Goldman Sachs Global Small Cap Core Equity Portfolio (LU1253914516), has been around for over a decade. It has an eyebrow-raising number of holdings for an active equity fund: more than 800 at the last count. While spreading the risk is a sensible strategy with small caps, there are limits: holding too many stocks can often mean the portfolio simply tracks the index, at a higher price than a low-cost passive fund. But in this case proof is in the performance, including in 2022 when the fund shed less than half the index’s 11 per cent drop. No position is larger than 1 per cent of the portfolio, indicating several return drivers, although the presence of silver miner Hecla Mining (US:HL) and circuit board maker TTM Technologies (US:TTMI) in the top 10 is instructive.
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One of the only funds to rival Goldman over one, three and five years is the Principal GIF Origin Global Smaller Companies fund, a portfolio not readily accessible to private investors. Of note however is the fact that Jupiter (which acquired the Origin team at the start of last year) has launched an active exchange traded fund (ETF) version of the strategy late last year, the HanETF Jupiter Origin Global Smaller Companies ETF (JOGP). The fund has a more conventional 182 holdings, with miners such as Canada’s Lundin Gold (CA:LUG) and the UK’s Pan African Resources (PAF) among the biggest overweights.
As with mainstream global indices, UK shares make up a relatively paltry amount of the World Small Cap index, at just 4.5 per cent. Few active funds deviate materially from single-digit levels, but one outlier is Oldfield Partners’ Overstone Global Smaller Companies (IE00BD3H6883) strategy, which has almost 30 per cent in domestic shares. Nor has performance been unduly harmed by this.
As sometimes happens with smaller company strategies, the fund uses a small and mid-cap benchmark, which means its largest picks include mid-caps JD Wetherspoon (JDW), Jet2 (JET2) and Frasers (FRAS). Concentration is more of a factor here – Wetherspoons accounts for over 9 per cent of the portfolio by itself – as is the fact that, at just £42mn in size, the fund may be at risk of closure in the years ahead because it is sub-scale.
A lack of assets, ultimately leading to a closure, is a risk for new funds, too. If a product fails to gain traction, it can be shut down within a handful of years.
In some cases, there is a degree of reassurance available. One of the newest funds in the sector, the Janus Henderson Global Smaller Companies (GB00BP47T486) fund, launched less than a year ago. It is the onshore sibling of a Luxembourg-domiciled fund, Janus Henderson Horizon Global Smaller Companies, that has more than £1bn in assets, which should mean its future is assured.
The latter vehicle, which the onshore version replicates, is the sector’s outright leader over three and five years, having returned almost 100 per cent over the past half-decade.
Describing the portfolio, manager Nick Sheridan says: “The fund will tend to have a valuation multiple below that of the market but a return profile that is higher than the market.”
“Hence, it could be said that if viewed as a single stock, the portfolio has the characteristics of a ‘fallen angel’, a company with historically high returns but one where the market believes these returns will degrade. We believe that when taken in aggregate, this is not the case.”
That said, the portfolio’s long-time top position, Comfort Systems USA (US:FIX), has returned some 1,800 per cent over the past five years, and 280 per cent since the market lows last April. As a provider of heating, ventilation and air conditioning (HVAC) systems, the stock is another indirect beneficiary of the AI and data centre boom.
| How global small-cap funds have performed | |||
|---|---|---|---|
| Fund name | 1-year (%) | 3-year (%) | 5-year (%) |
| Janus Henderson Horizon Global Smaller Companies | 15.9 | 76.4 | 96.8 |
| IFSL Marlborough Global SmallCap | 6 | 65.2 | N/A |
| Principal GIF Origin Global Smaller Companies | 20.2 | 56.6 | 76 |
| Goldman Sachs Global Small Cap Core Equity Portfolio | 18.3 | 56.3 | 78.7 |
| Overstone Global Smaller Companies | 24.3 | 47.5 | 57.1 |
| Herald Investment Trust | 11.9 | 44.4 | 11.9 |
| Artemis SmartGARP Global Smaller Companies | 10.7 | 38 | 42.4 |
| The Global Smaller Companies Trust | 14.9 | 29.1 | 38.1 |
| Edinburgh Worldwide IT | 16.8 | 26.8 | -42.3 |
| Smithson Investment Trust | 2.3 | 12.2 | -6.7 |
| North Atlantic Smaller Companies IT | -0.9 | -0.4 | -5.2 |
| MSCI World Small Cap Index | 14 | 39.3 | 45.4 |
| Source: FE |
Two others funds are also worthy of a brief mention. IFSL Marlborough Global SmallCap (GB00BQPB2364) is second only to Janus Henderson in terms of three-year returns. Notably, it has achieved this performance with a lower weighting to the US than most (45 per cent at the portfolio), even if it does share one top holding, US copper products manufacturer Mueller Industries (US:MLI), with Sheridan’s fund. A one-year return of just 6 per cent, triggered by a steep pre-“liberation day” drawdown early last year, as well as a truly sub-scale size of £8mn, are reasons for caution.
Finally there is Artemis SmartGARP Global Smaller Companies (GB00B568S201). The growth at a reasonable price (Garp) system has translated into top-quartile returns for other Artemis funds of late, but the small-cap strategy remains one of the active funds to have lagged the index over one, three and five years. New management might yet change that: Raheel Altaf, who runs other SmartGARP funds, took over the portfolio in October.
Investment trusts
Global small-cap investment trusts’ performance has been worse than open-ended funds’, largely owing to the specifics of the former group’s investment strategies. Only three of the five trusts are even in the black over the past half-decade. Edinburgh Worldwide (EWI) has shed 42 per cent, largely due to its huge slump in 2021 and 2022 as rising interest rates put its portfolio of speculative and unlisted tech shares to the sword. The trust’s large position in SpaceX (16 per cent of assets), as well as other big unlisted holdings such as quantum computing stock PsiQuantum, continue to make it stand out from the crowd, for better or for worse.
EWI is among the trusts to have attracted attention (and fierce criticism) from activist Saba, and although it has now survived two attempts to oust its board, the future of Saba’s 30 per cent stake is yet to be resolved. Another small-cap trust has already bowed to pressure: Fundsmith’s Smithson (SSON) is to convert into an open-ended fund in March. As with Terry Smith’s flagship fund, Smithson’s focus on out-of-favour quality shares has hurt performance, as has its stock selection.
Another Saba target, Herald (HWI), is at least in positive territory over the past half-decade, but remains well behind the benchmark. A policy of investing in small-cap UK and US tech stocks at least offers something different to peers, although a proposed 100 per cent tender means the trust’s future is uncertain.
A US-UK split is also part of the strategy at North Atlantic Smaller Companies (NAS), albeit it has had less joy still over the short term. Unusually, manager Christopher Mills of Harwood Capital – known in the sector for activist campaigns at Hipgnosis Songs and PRS Reit – invests in other investment trusts as well as listed and unlisted stocks. His biggest holdings include UK small-cap trust Odyssean (OIT) as well as another of Harwood’s funds, Oryx International Growth (OIG).
Perhaps it’s not that unusual. The Global Smaller Companies Trust (GSCT) also holds a variety of other funds and trusts in areas where its parent company Columbia Threadneedle professes to have limited experience. In practice, this means emerging market funds, which make up a relatively sizeable 15 per cent of the portfolio. Founded in 1889, its manager, Nish Patel, is somewhat newer, having taken over in May 2024, albeit he has worked on the fund for more than 15 years. With over half the share register held by Columbia Threadneedle employees, the trust is unlikely to attract the activist attention its peers have seen. Patel describes the trust’s investment style as “conservative” and, while that will be welcome to many in the often racy world of small-caps, he will be hoping performance can catch up with some of the sector’s young upstarts over the medium term.
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