Little pearls, big ones.
Small caps. Shares in smaller companies often receive little attention from the analysts of large financial institutions. As a result, there are always particularly interesting opportunities to discover in this segment. "But a truly successful, long-term small-cap strategy requires a global and active approach and a lot of know-how," Scott Woods and Neil Robson of Columbia Threadneedle are convinced.
Numbers don't lie. While the small-cap index of the data provider MSCI has risen by around 600 percent since 1998, the corresponding large-cap benchmark only shows an increase of slightly more than 200 percent. "That's impressive," says Neil Robson, head of global equities at Columbia Threadneedle, "just too bad many investors didn't get anything out of it."
In fact, the public, investors and analysts pay much more attention to larger companies. "This is good for us. Because the past 20 years are no exception. Small companies systematically generate higher returns. And because this takes place under dem Radar of many market participants, exists for us the chance to acquire these at the stock exchange with a discount to its internal value , makes Neil Robson clear. In this analysis, the market expert refers to the so-called small-cap effect. Numerous studies have shown that shares in small companies generate a higher long-term return than their large counterparts.
The arguments for this are manifold. "In our experience, smaller companies tend to be more entrepreneurial than large groups, they are more flexible and can therefore respond more quickly to changing market conditions or a changing environment," explains Scott Woods, fund manager of the Threadneedle Global Smaller Companies Fund.
Others point out that, in principle, these companies only move into the large, broad indices once their market value has reached a certain level. "But on the way there a large part of the performance is already done," Woods agrees. A third explanation starts with the risk. Shares of small companies are more susceptible to economic fluctuations, their prices fluctuate more strongly and they are less liquid in daily trading. To compensate for this, they would have to offer a correspondingly higher return. "That, too, cannot be dismissed," Woods considers, "but if the investment horizon is long-term, higher volatility is irrelevant. And as far as cyclicality and liquidity are concerned, that is clearly correct. But that's why this investment approach is so dependent on stock selection."
Columbia Threadneedle has more than 5000 companies in its investment universe. "And believe me - there are not many fund managers or analysts who stop by other than me. This gives me the chance to discover real pearls and then buy their shares comparatively cheaply," smiles Woods.
For Woods alone, who includes 70 to 90 shares in the portfolio of his fund, it would of course be impossible to manage so many company visits and talks with the bosses. "At Columbia Threadneedle, however, I have the advantage of having a global team of experts in Asia, the USA and Europe."
Above all, the fund manager can rely on his colleagues to follow a similar analytical philosophy. "In this way, we are able to search consistently for the best companies worldwide."
Woods focuses on leading providers in niche markets who have been able to create a kind of economic moat around their business model. "This way they keep the competition in check and can influence prices in their field. This ensures consistently high margins," Robson adds.
A deep understanding of a company's industry structure and business model is therefore crucial. Woods and his colleagues use the model of competitive forces according to Michael E. Porter as an aid. Specifically, Woods and his team ask five questions: Are there entry barriers for new competitors? How high are these? Welche Does a company have negotiating strength with its suppliers? What about the customers? Und To what extent is there a threat from substitutes?
From this, in turn, the competitive situation in a market can be derived. "Take Pool Corporation, a US distributor of swimming pools and pool accessories," Woods explains. "Their market share today is around 40 percent, which is as high as the combined market share of the following two to three competitors. As the company is also the largest customer of pool accessories and equipment and has around 100,000 customers, it has pricing power on both sides. In this constellation it is hardly possible for new competitors to penetrate this market quickly and successfully."
This gives the company a sustainable competitive advantage. "And the basis for generating high, sustainable returns in the long term." And that's exactly what this idea is all about: Those who increase their turnover above average and earn higher margins than their competitors will gradually increase the value of the company.
One question remains: Spiegelt does not reflect the success of the past 20 Jahre long den Charme of this strategy? "I don't think so. In our view, second-line stocks still have a very attractive risk premium. However, it is important that we carry out consistent risk management. If the quality of the company deteriorates, the originally assumed investment idea turns out to be wrong or our calculated price target is reached, we sell immediately. Those who proceed in such a disciplined manner have a good long-term chance of achieving a return above the market with small caps," Scott Woods makes clear.
After all, all large corporations started out small on the stock market. Even Microsoft or Google were once small caps.
// How to invest - the Global Smaller Companies Fund.
With the Threadneedle (Lux) Global Smaller Companies Fund (LU0570870567), Scott Woods and his team invest in companies with a market capitalisation of less than ten billion dollars. In total, he is building a portfolio of 70 to 90 companies.
"As a rule, my focus is on industries such as industry, technology or healthcare," explains the fund manager, "because we see a lot more innovation here than in other sectors.
In regional terms, US stocks account for around half of the portfolio, while European small caps account for around 30 percent.
Overall, the fund has grown by around 15 per cent per annum over the past five years, outperforming its benchmark by 3.8 percentage points per annum.
069 297 299 77; Philipp.Kowollik@ columbiathreadneedle.com
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