STANDARD LIFE GLOBAL: Duo's 45 per cent gain makes strong case for investing in smaller firms

By Jeff Prestridge, Financial Mail on Sunday

Updated: 05:40 EDT, 27 November 2013

Supporter: Fund manager Alan Rowsell holds fashion group Asos

Investing in smaller companies remains unpopular among many investors because of its perceived high risk. In September, four times as much money went into dividend-friendly UK equity income funds as it did into UK smaller companies funds.

Yet some fund managers remain convinced that the risk-adjusted returns from a portfolio of under-researched smaller company shares – UK or worldwide – make for a compelling investment case.

One is Alan Rowsell, who under the eye of ‘star’ manager Harry Nimmo has got the Standard Life Global Smaller Companies fund off to a flying start.

Since launch early last year, it has returned 45 per cent – far more than a fund tracking the FTSE All-Share index. Rowsell runs the fund on a day-to-day basis while Nimmo oversees it.  

Although the fund has yet to be tested in a bear market – smaller firm shares tend to outperform in rising markets and underperform when they fall – Rowsell believes global smaller companies are an ‘under-appreciated asset class’.

He says: ‘Investment bankers and brokers increasingly focus their attention on large companies. It is where all the effort of hedge funds is concentrated.

'They’re not interested in smaller companies, which explains why it is a neglected asset class. Yet neglect doesn’t mean there are not opportunities out there to generate strong returns.’

Standard Life’s approach is scrupulous. Starting with 6,000 firms with market values below $5billion (£3.1billion), it uses a sophisticated screening process to refine the list of investable stocks to 800. Those that pass this test tend to have sustainable earnings growth in industries where there are stiff barriers to entry.

Rowsell then compiles the fund’s portfolio from the 800, ensuring the sectors and countries best represented are reflected in the fund. The result is a portfolio of 53 stocks with a strong US bent and a big internet and mobile theme. Familiar London-listed shares in the portfolio include Asos, the internet fashion retailer, and bookmaker Paddy Power.

Mark Dampier, funds expert at broker Hargreaves Lansdown, says too few investors have sufficient exposure to smaller companies. He adds: ‘I see this fund as an ideal long-term investment for a self-invested personal pension, one that goes in the bottom drawer.’