Small caps: too big to ignore

Why should investors consider investing in global smaller companies?

The Global Small Cap universe offers investors the chance of long term capital appreciation, with small caps having outperformed large caps over the last 20 years.

This is down to the higher growth potential of small cap stocks and the fact that the asset class tends to be less efficient.

It is this inefficiency that allows skilled active managers greater opportunity to add value over the long term.

At the same time, by adding the asset class to a large cap focused portfolio, investors have the ability to enhance returns through portfolio diversification. Given different sector and country exposures, small and large cap indices can perform at different times.

What is your approach to smaller companies investing?

At abrdn, we are one of the largest and most experienced SC managers in the market, with a dedicated Smaller Companies team and well-established process.

We take a bottom-up approach and invest in companies with attractive quality, growth and momentum characteristics

To help us, we use our proprietary quants tool known as the matrix to screens the entire universe of 6,000 stocks and hone our research efforts towards the most interesting opportunities.

We’re looking for those rare companies that, we think, have what it takes to be a potential large cap leader of tomorrow, resulting in a high conviction portfolio of around 50 stocks.

Admittedly, the SC universe does carry increased risk. We mitigate this by carrying out rigorous fundamental research and by only investing in what we consider to be high quality, established, profitable companies.

What themes are you currently investing in?

Whilst we are not thematic investors, through our bottom-up stock selection various structural growth themes have emerged

One of these is Resilient Consumption. Around the world we have identified a number of niche consumer focused companies with excellent managements team that have executed on their strategy to deliver year-on-year returns and achieve market leading share.

Likewise, we see companies that are driving Digital Evolution. These companies are breaking the mould in whichever industry they compete in and providing digital solutions to all aspects our of lives and work and making these areas far more efficient and effective.

What is your outlook going forward?

We believe an allocation to the asset class should be long term and strategic, and now is an attractive time to consider entering the market

Two key factors to consider here are rate cuts and valuations.

Whilst we may not know the timing of rate cuts, the direction has become clearer. Data shows that historically SC have outperformed in a rate cutting environment.

As far as valuations are concerned, the asset class is currently trading at a discount to its own history and to large caps.

We are optimistic that as we move in 2025, many of the macro unknowns of this year are known. As a result, we expect volatility to come down, which should allow investors to focus on strong company fundamentals once again.