Download The case for investing in smaller companies

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The case for
investing
in smaller
companies
Small companies provide
big opportunities
Smaller companies are under-researched despite their proven ability to broadly outperform
their larger peers. They remain overlooked, and investors who choose this dynamic asset
class have the potential to continue to be rewarded into the future.
Smaller companies superior performance
350%
300%
250%
200%
150%
100%
50%
0%
-50%
MSCI World Small Cap Index [302.78%]
Although marginally more volatile than their larger counterparts, since the start of the
century global smaller companies have delivered superior returns to larger companies.
The case for investing in smaller companies
17
y
MSCI World Index [84.05%}
Source: FE Analytics, 31 December 1999 to 31 March 2017
02/12
20
16
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Ja
nu
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20
14
Ja
Ja
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20
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Ja
nu
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20
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Ja
nu
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y
20
08
Ja
nu
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20
06
Ja
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20
04
Ja
nu
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20
02
20
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20
00
-100%
The investment process
Standard Life Investments aim to identify positive drivers of
change within a company that have not yet been identified
by the wider market. With a focus on finding high quality,
profitable businesses with significant growth potential, the
smaller companies team seek to identify tomorrow’s larger
companies today.
What do the team look for in a
smaller company?
The experience of the smaller companies
team is that companies with potential for
high returns typically exhibit organic
expansion and operate in growth sectors.
They look for companies that have
¬ high quality business models
¬ elevated levels of recurring revenue
¬ strong cashflow
How are the stocks chosen?
In the search for companies with long-term
sustainable growth prospects, the smaller
companies investment team are supported
by their stock screening tool. The tool is used
to track a group of factors that have been shown
to enhance stock performance. These include:
Getting to know the companies
The smaller companies team place face-toface meetings at the core of their investment
process, allowing them to perform in-depth
qualitative analysis, which provides a number
of benefits:
1) They allow the team to cross-check the
accuracy of their investment rationale. This
could mean scrutinising company forecasts
or verifying assessments based on the stock
screening tool with company management.
2) They allow the team to assess the strength
and repeatability of a company’s business
model. Factors such as recurring revenue,
barriers to entry, price flexibility and market
share are all important considerations.
¬ measures of price and earnings momentum
¬ valuation
¬ earnings growth
¬ cashflow
¬ balance-sheet strength
This process enables the team to create a
manageable list of companies on which they
can focus their research capabilities in order
to identify high-quality companies with the
potential to outperform.
“ The smaller companies
team seek to identify
tomorrow’s larger
companies today.”
The case for investing in smaller companies
03/12
Why invest in
smaller companies?
1
Small companies provide big opportunities
Smaller companies have the ability to deliver strong earnings regardless of what is happening
in the wider economy, and have risk-adjusted returns that are superior to those of large companies.
Risk-adjusted returns measure the return of an investment compared with its volatility. Smaller
companies generate greater returns for a given amount of risk than larger companies.
Risk adjusted returns by region (January 2001 to December 2016)
Larger companies
Smaller companies
% return per % unit of risk
0.6
0.5
0.4
0.3
0.2
0.1
0
USA
Europe ex UK
UK
Japan
Pacific ex
Japan
Emerging
Markets
Source: Standard Life Investments, 01 January 2001 to 31 December 2016
2
3
04/12
Opportunities to add value
Smaller companies are an under-researched asset class, which opens up opportunities for the
smaller companies team to find compelling investment ideas that others have yet to discover.
Room to grow
Smaller companies tend to be undervalued relative to their growth prospects and have
potential for substantial returns that are more difficult to achieve from companies perceived
to be fully grown.
The case for investing in smaller companies
Why Standard Life for
smaller companies?
Standard Life Investments is a leading asset manager with
an expanding global reach. Their wide range of investment
solutions is backed by their distinctive investment philosophy,
disciplined risk management and commitment to a culture of
investment excellence.
1
2
3
Flexibility in your investment options
With three funds investing across different markets, the Standard Life smaller companies funds
offer greater flexibility and meaningful diversification to our clients.
The resource capabilities of a leading
asset manager
The smaller companies team have an exceptional reputation within the industry and a proven
track record in smaller companies investing. At the heart of their success is over 1700 investment
professionals and support staff working for Standard Life Investments around the world. They
thoroughly research and analyse each company before they add it to any fund. They constantly look
ahead to anticipate change so they can deliver the best rewards for investors.
A robust, repeatable and proven
investment process
Standard Life Investments combine the use of their stock screening tool with in-depth qualitative
analysis by the smaller companies investment team. This has resulted in the funds’ strong
performance record to date. The investment process, and an emphasis on quality, provides a solid
grounding that allows the funds to perform consistently in the medium-long term.
The case for investing in smaller companies
05/12
Standard Life Global
Smaller Companies Fund
The Standard Life Global Smaller Companies Fund aims to
provide long term growth by investing predominantly in the
shares of smaller companies listed on the global stock markets.
The fund typically holds a concentrated portfolio of stocks and
is actively managed by Standard Life Investments.
Fund Manager
Alan Rowsell
Launch Date
14 Oct 2013
Fund Size
€26.1m
Underlying Fund Size £495.8m
Base Currency
EUR
AMC
1.55%
Source: Standard Life Investments, 31 March 2017
Performance from 14 October 2013 to 31 March 2017
60%
45%
30%
15%
0%
20
17
M
ar
ch
Oc
to
be
r2
01
6
20
16
M
ar
ch
Oc
to
be
r2
01
5
20
15
M
ar
ch
Oc
to
be
r2
01
4
20
14
M
ar
ch
Oc
to
be
r2
01
3
-15%
Source: Standard Life Investments, 14 October 2013 to 31 March 2017. Net of annual management charge.
Performance based in Euro.
Performance to 31 March 2017
3 Months
6 Months
1 Year
3 Years
Since Launch
7.3%
10.7%
21.0%
12.9% p.a.
13.1% p.a.
Source: Standard Life Investments, 31 March 2017. Net of annual management charge. Performance based in Euro.
06/12
The case for investing in smaller companies
Stock Spotlight - Sunny Optical Technology
Sunny Optical Technology, a Hong-Kong listed manufacturer of camera modules and vehicle lenses,
has performed extremely strongly in 2016 and into the start of 2017, with the share price more
than doubling year-on-year by the end of March 2017. They continue to benefit from the shift to
dual camera handsets and are the world leader in the growing market for vehicle lenses.
Top Five Holdings
1. Sunny Optical Technology
A Chinese optical instrument and lens manufacturer
2. Cognex Corporation
A US manufacturer of machine vision systems used in automated manufacturing
3. Fever-Tree
A UK producer of premium drink mixers
4. Start Today
A Japanese E-commerce business
5. HEICO
A US aerospace, industrial, defense and electronics company
Source: Standard Life Investments, 31 March 2017
Fund Composition by Sector
Industrials 23.7%
Information Technology 21.4%
Consumer Discretionary 16.4%
Financials 11.9%
Consumer Staples 10.5%
Health Care 8.6%
Energy 2.8%
Real Estate 2.4%
Available Cash 2.3%
Source: Standard Life Investments, 31 March 2017
Fund Composition by Country
USA 44.5%
Japan 11.8%
UK 11.2%
Germany 5.8%
Italy 5.5%
China 5.2%
Taiwan 3.6%
France 2.5%
Cash and Other 2.3%
Ireland 1.7%
Netherlands 1.5%
Mexico 1.4%
Australia 1.3%
Sweden 1%
Austria 0.7%
Source: Standard Life Investments, 31 March 2017
The case for investing in smaller companies
07/12
Standard Life European
Smaller Companies Fund
The Standard Life European Smaller Companies Fund aims to
provide long term growth by investing predominantly in the
shares of smaller companies listed on European stock markets,
including the UK. The fund is actively managed by Standard Life
Investments, who will select stocks to try to take advantage of
opportunities they have identified.
Fund Manager
Andrew Paisley
Launch Date
8 Aug 2007
Fund Size
€112.5m
Underlying Fund Size €426.7m
Base Currency
EUR
AMC
1.50%
Source: Standard Life Investments, 31 March 2017
Performance from 8 August 2007 to 31 March 2017
150.00%
112.50%
75.00%
37.50%
0%
-37.50%
Au
gu
st
20
16
M
ar
ch
20
17
Au
gu
st
20
15
Au
gu
st
20
14
Au
gu
st
20
13
Au
gu
st
20
12
Au
gu
st
20
11
Au
gu
st
20
10
Au
gu
st
20
09
Au
gu
st
20
08
Au
gu
st
20
07
-75.00%
Source: Standard Life Investments, 08 August 2007 to 31 March 2017. Net of annual management charge.
Performance based in Euro.
Performance to 31 March 2017
3 Months
6 Months
1 Year
3 Years
5 Years
Since Launch
6.3%
5.0%
6.3%
10.6% p.a.
16.7% p.a.
9.2% p.a.
Source: Standard Life Investments, 31 March 2017. Net of annual management charge. Performance based in Euro.
08/12
The case for investing in smaller companies
Stock Spotlight - Fever-Tree
Fever-Tree is a producer of premium drink mixers who continue to hit new highs as gin and tonic
consumption increases. In 2016 the UK alone drank 1.12bn gin and tonics, with gin breaking the
£1bn sales mark for the first time ever (Source: Wine and Spirit Trade Association). Britain remains
Fever-Tree’s largest market, although the company has expanded into 65 countries.
Top Five Holdings
1. Fever-Tree
A UK producer of premium drink mixers
2. Nemetschek
A German vendor of software for architects, engineers and the construction industry
3. Kesko
A Finnish retailing conglomerate
4. Intrum Justitia
A Swedish credit management services group
5. Borregaard
A Norwegian biorefinery that manufactures products based on the different components in wood
Source: Standard Life Investments, 31 March 2017
Fund Composition by Sector
Industrials 40.6%
Materials 12.8%
Consumer Discretionary 11.8%
Consumer Staples 11.4%
Information Technology 8.7%
Real Estate 6.2%
Cash and Other 3.6%
Health Care 3.5%
Financials 1.4%
Source: Standard Life Investments, 31 March 2017
Fund Composition by Country
United Kingdom 32.8%
Germany 20.1%
France 9.7%
Netherlands 5.7%
Switzerland 5.1%
Finland 4.5%
Sweden 4.3%
Cash & Other 3.6%
Ireland 3.6%
Norway 3.4%
Italy 3.2%
Spain 2%
Denmark 1.1%
Austria 0.9%
Source: Standard Life Investments, 31 March 2017
The case for investing in smaller companies
09/12
Standard Life UK Smaller
Companies Fund
The Standard Life UK Smaller Companies Fund aims to provide
long term growth by investing mainly in the shares of smaller
companies listed on the UK stock market. The fund is actively
managed by Standard Life Investments.
Fund Manager
Harry Nimmo
Launch Date
1 Apr 2005
Fund Size
€70.2m
Underlying Fund Size £1259.0m
Base Currency
EUR
AMC
1.30%
Source: Standard Life Investments, 31 March 2017
Performance from 1 April 2005 to 31 March 2017
400%
300%
200%
100%
0%
Ap
ril
20
16
M
ar
ch
20
17
Ap
ril
20
15
Ap
ril
20
14
Ap
ril
20
13
Ap
ril
20
12
Ap
ril
20
11
Ap
ril
20
10
Ap
ril
20
09
Ap
ril
20
08
Ap
ril
20
07
Ap
ril
20
06
Ap
ril
20
05
-100%
Source: Standard Life Investments, 01 April 2005 to 31 March 2017. Net of annual management charge.
Performance based in Euro.
Performance to 31 March 2017
3 Months
6 Months
1 Year
3 Years
5 Years
10 Years
Since
Launch
7.5%
10.6%
6.5%
8.4% p.a.
14.5% p.a.
7.8% p.a.
12.1% p.a.
Source: Standard Life Investments, 31 March 2017. Net of annual management charge. Performance based in Euro.
10/12
The case for investing in smaller companies
Stock Spotlight - JD Sports Fashion
JD Sports Fashion is an athleisure retailer benefiting from societal shifts towards healthy living
and growth in casual sports fashion. The company has seen substantial success in the UK and
is bringing a strong presence to the international market. Exclusive product ranges from brands
such as Adidas and Nike have led to a differentiated edge versus competitors. JD Sports is a
strong example of the benefits of momentum in smaller companies.
Top Five Holdings
1. Sanne
A provider of fund and corporate administration services
2. First Derivatives
A provider of products and consulting services to finance, technology and energy institutions
3. JD Sports Fashion
A sports fashion and footwear retailer
4. Dechra Pharmaceuticals
A manufacturer of veterinary pharmaceuticals and products
5. NMC Healthcare
A UK listed private healthcare provider operating in the United Arab Emirates
Source: Standard Life Investments, 31 March 2017
Fund Composition by Sector
Industrials 24.8%
Consumer Goods 12.9%
Health Care 10.8%
Consumer Services 19.3%
Telecommunications 5.5%
Financials 12.9%
Technology 12.1%
Cash and Other 1.7%
Source: Standard Life Investments, 31 March 2017
The value of your clients’ investment may go down as well as up and may be affected by changes
in currency exchange rates. Past performance is not a reliable guide to future performance.
The case for investing in smaller companies
11/12
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