Small companies + investment trusts = buying opportunity
The received wisdom is that small companies have greater growth potential than large companies, partly because they tend to specialise in certain sectors, products and services.
They also tend to be more focused on the domestic economy than large-cap stocks although these days many small companies are exporters. It is of course a long-term theme too, but buying at the right time is important for long-term success.
Perhaps not surprisingly in the current economic environment when investors have shunned risk, small-cap funds have not had the best of times. Over the past 12 months the UK Small Companies investment trust sector is close to being five percentage points behind the FTSE All Share index having been ahead of it mid-way through the period.
If an economic recovery is happening, albeit quite a modest one, as data this year suggests and a recession is going to be avoided then small caps look attractive.
Top picks
In the investment trust sector there are some very attractive discounts. Blackrock Smaller Companies is on 17%, Henderson Fledgling on 20% and Standard Life UK Smaller Companies is on 8.5% to highlight a few.
These discounts have fluctuated widely and Standard Life has been on a premium in the past 12 months, but they are presently much closer to their lows than highs. Furthermore the NAV performance of the three trusts mentioned has been stronger than their share price performance in the past 12 months.
These trusts offer high quality management too - Mike Prentis and Richard Plackett manage the Blackrock Small Companies trust and are hugely experienced. Harry Nimmo manages the Standard Life UK Smaller Companies trust and needs little introduction as one of the most highly rated UK small-cap managers which is why the fund trades on a smaller discount.
The Henderson Fledgling trust is effectively a tracker but there is an active management overlay; this is one to catch when the discount is wide and the outlook is improving, so now may be the time to look at this fund.
In the same vein, European small-cap trusts look interesting - discounts are closer to lows than highs and with the added concern over the eurozone crisis investor appetite for them has been minimal.
There has been an uptick in the value of these small-cap trusts recently but on a five-year view when the world will be in a very different place, they appear to offer an attractive buying opportunity.