What are the key benefits of investing in small cap funds?

Graham McCraw: Historically, investing long-term in small caps – smaller companies valued at less than €5 billion or thereabouts – has produced better returns than putting money into large cap companies. That’s as an average across all markets, but if a small cap fund is actively managed by a team of specialists, returns can be boosted even further.

It’s also worth considering that the large cap leaders of tomorrow are among today’s small cap market, which means that long-term investors are in a position to reap the benefit as these companies grow.

Diversification is always a wise policy, and holding both small and large cap stocks is a sound strategy, especially because small caps tend to be domestic in scope and therefore less vulnerable to global trends and currency fluctuations.

Your small cap funds consistently offer above-market returns – why is that?

All of our key small cap strategies have significantly outperformed their respective benchmark, which we believe is testament to our well-resourced teams, robust investment process and experience managing assets in this space.

Rigorous due diligence is crucial to our success: our teams attend hundreds of meetings every year with the management teams at smaller companies where we evaluate corporate strategies and environmental, social and governance risks. We search for emerging winners: those under-researched innovators who are set to become leading companies in the future.

Another important aspect is that we manage concentrated portfolios – ranging from 40 to 90 stocks, depending on strategy – where every stock has a meaningful impact on performance.

How do you ensure that you invest only in high-quality small cap companies?

Our portfolio managers place a premium on transparency, stable finances and sustainable earnings. Our teams target firms that have a strong market share and can raise prices to counter increasing costs without hurting sales. Firms that generate high returns on capital are also attractive because they are able to reinvest in their own growth. We also look for businesses that have defendable competitive advantages that can’t easily be reproduced by others. Quality of management is also vital.

Before any stock makes it into a portfolio, it has to go through a rigorous peer-review process. In these meetings, team members challenge and refine the case for investment. The quality of the company is a fundamental aspect of this discussion. We won’t invest in stocks that aren’t of high quality.

Challenges

Picking stock 

Aberdeen Standard Investments actively manages its funds. For the European Small Cap strategy, part of this approach involves using a proprietary screening tool called the Matrix. This process has been in place for over 20 years and has a track record of delivering robust returns. For instance, its European Smaller Companies Fund outperformed the FTSE Developed Euro Small-Cap index by 87% since inception of the strategy in October 2007.

Checking for quality


The Matrix is only part of the process for the European Smaller Companies strategy, however. Once likely stocks have been identified, Aberdeen’s team of expert portfolio managers carry out detailed fundamental analysis, interview the companies’ management team and discuss the investment thesis within teams, to ensure only the very best names make it into the portfolio.

Wide horizons

In order to satisfy its investors’ needs, Aberdeen Standard Investments offers a range small cap funds based on different markets. These include Asian, European, North American and Japanese funds along with those selected from global and emerging markets.

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