With thousands of names spanning a wide gamut of sectors, new fund focuses on 'rich and diverse picking ground'
As portfolio diversification continues to be the watchword for accredited investors, a newly introduced fund promises to widen their access to a still relatively untapped asset class.
Focused on Canadian accredited investors, the new abrdn Canada Funds - Global Smaller Companies Fund offers the potential for attractive long-term risk-adjusted returns from exposure to the global small-cap universe, underpinned by a platform of investment expertise and oversight operating on a global scale.
“The global small cap universe is a very exciting and diverse space,” says Kirsty Desson, Investment Director at abrdn. “If you look at the MSCI Global Small Cap Index, it only represents 15% of the world’s companies by market cap, it actually makes up two thirds of the world’s companies – that’s around 6,000 stocks – which gives us an extremely rich and diverse picking ground.”
While the term “small cap” might evoke images of scrappy startups, the fund’s opportunity set actually goes further up the spectrum to capture household names and global leaders in niche markets. In the U.S. market, the upper band of small caps can reach US$26 billion in market capitalization.
Exposure to small caps, Desson notes, can be desirable given that over the past 10 to 20 years, small cap companies have significantly outperformed large cap names – an intuitive consequence of where small companies tend to be in their growth and development. And because the small cap space tends to get less attention – small-cap companies tend to be covered by around six analysts on average, compared to more than 20 for large-cap firms – there are more inefficiencies for active and well-resourced fund managers to exploit.
“Despite the tremendous outperformance we’ve seen from small caps, they’re trading at a relative discount to large-cap stocks on a valuation basis,” she adds. “That’s been the case since around 2018, when we saw the emergence of the FANG stocks that later took leadership in the market.”
To manage risk within their portfolios, Desson says a lot of work goes into selecting for quality companies with strong balance sheets, sustainable growth profiles, non-cyclical revenue models, and solid management teams. Abrdn’s internal analyses suggest that by putting up to 80% of their equity allocation into a global small-cap strategy like theirs, investors can get a more attractive risk-return profile compared to having 100% of their stock portfolio in large caps.
That’s not to say the strategy will work for everyone. Steven Goth, who works as a Client Relationship Manager at abrdn’s Canadian operations, stresses that the strategy is a private fund meant to address the needs of higher-tier accredited investors including pension plans, endowments, foundations, family offices, and ultra-high-net-worth individuals.
“We’ve set a minimum investment of $5 million for this particular fund,” Goth says. “Ideally, we’d be looking at thoughtful investors who want a strategic, longer-term allocation to the asset class, which we believe could be an important complement to the Canadian stock market where only a few sectors tend to dominate. And they’re looking to invest based on a repeatable, research-driven process.”
While Desson says the fund is largely agnostic with respect to country and sector allocations, their investment process has tended to result in an overweight position toward the U.K., where she says a lot of well-run, founder-led companies tend to emerge. German mittelstand companies – which include extremely well-run SMEs distinguished by their strong brands, technological edge, or ESG credentials, among other attributes – also tend to get attention. The portfolio also often goes overweight in Taiwan, while shying away from more cyclically related countries.
“In terms of sector skews, the fund will often be overweight in industrial names, consumer discretionary names, health care, communications, because the growth of these company is mostly driven by strong strategic management rather than the external environment,” Desson says.
While the fund’s bottom-up investing process focuses more on the strength of individual companies, the portfolio has tended to reflect broad themes such as digitization come through. In keeping with its quality focus, abrdn has also been inclined to include names that have resilient, highly visible revenue streams.
“We have been becoming more cautious about the outlook for economies as we go into the second half of the year,” Desson says. “Hence, we've been tilting the portfolio slightly more towards companies that have a very resilient spending or a high degree of recurring revenues.”