Why global small-caps
We believe the reasons for superior small-cap returns are structural:
- Niche. Smaller companies have frequently carved out a market niche for themselves, in which they have an excellent reputation, leading to pricing power and a sustainable high return on invested capital;
- Growth. It is generally easier for companies to grow from a small base. The likelihood of identifying companies whose value can increase substantially is therefore much greater for small companies than large companies;
- Under the radar. Small companies are more often mispriced as a result of information scarcity. Small companies generally receive very little attention from newspapers and are covered by fewer, if any, brokers. This can consequently create situations where the price of a small company’s share price can diverge materially from what an informed investor would be willing to pay for a business;
- Management. Smaller companies are more often managed by founders or other individuals with significant equity ownership, ensuring close alignment with smaller shareholders. One of the key benefits is a focus on the long-term, and an increased willingness to sacrifice short-term profits for sustainable growth.
Historically, smaller companies operated locally or regionally, whilst today most equivalent-sized companies are producing and distributing their products and services on a global scale. In our pursuit of attractive companies active in growing niches, we believe that global small-caps, without regional constraints, offer the best chance to achieve strong long-term investment returns.
* Source: Ibbotson SBBI