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3 top global small-cap funds

Nicholas Grove  |  26 Jul 2016Text size  Decrease  Increase  |  

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Global equities currently look more attractive than Australian equities on a relative valuation basis, Morningstar Investment Management's head of multi-asset income, Brad Bugg, told attendees at the 2016 Morningstar Investment Conference in Sydney.

However, it's important to define what is meant by the term "global equities".

"We try to break it down as much as we can--by region, by sector. So we're really trying to target particular regions or sectors rather than just blindly investing in what a benchmark might dictate us to," Bugg says.

"In our portfolio, we have heavy weights towards emerging markets, Japan, and countries which may not necessarily get a big weight in a traditional benchmark index.

"That's where we see the opportunities and that's where we're biasing our portfolios."

Global equities can be a compelling asset class in which to invest, and there are Morningstar Medal-rated global small-cap funds that can provide investors with some solid diversification as part of a broader equities allocation.

1) Dimensional Global Small Company Trust

With low costs, a robust approach, and style tilts, the Bronze-rated Dimensional Global Small Company Trust [6467] is a great diversifier within a broader equity sleeve, according to Morningstar fund analyst Anshula Venkataraman.

"Dimensional Global Small Company Trust provides diversified international small-cap exposure for a very reasonable price," she says.

"Dimensional seeks to exploit equity market characteristics that it has identified as long-term historical drivers of return.

"By eschewing fundamental or macroeconomic predictions and focusing on these factors of return, the result is a highly diversified 4,000-stock portfolio with a bias towards smaller market capitalisations and stronger profitability."

On a regional basis, the fund had an 11.5 per cent exposure to Japan as of the end of May 2016, while its top stock holdings include Danish biotech company Genmab and California-based medical-device company Align Technology.

2) Lazard Global Small Cap Fund

Morningstar senior analyst Alexander Prineas describes the Lazard Global Small Cap Fund [4869] as "one of the better ways" to access global small caps.

He says the Bronze-rated strategy's stability and consistent execution deserve recognition.

Emerging market small caps account for up to 7 per cent of the portfolio. This follows small-cap manager Alex Ingham in 2011 joining Lazard's dedicated emerging markets team, which Prineas rates highly.

This appointment gave lead manager Ed Rosenfeld research on emerging markets small caps--which Prineas says is a valuable asset given the rapid development in these economies.

Prineas explains that the strategy's emphasis is on quality, scouting out companies with healthy returns on capital, barriers to competition, and a focus on shareholders.

"While small caps can be volatile, the 60-90 stocks in the portfolio make it sufficiently diversified for long-term investors," he says.

Some of the fund's largest stocks exposures include FLIR Systems, a company specialising in the design and production of thermal imaging cameras, and Rightmove PLC, a UK-based online real estate portal.

3) Vanguard International Small Companies Fund

The Vanguard International Small Companies Fund [15897] is a passive vehicle which aims to track the MSCI World ex-Australia Small Cap Index, a benchmark comprising about 4,000 small-cap names around the world.

Prineas says capable index-tracking should be enough to keep Vanguard International Small Companies ahead of most rivals.

"A large part of its advantage comes from the low cost--at 0.39 per cent, it is cheaper than active rivals," he says.

"While the best active managers can beat global small-cap benchmarks, few are available to Australian retail investors.

"For dedicated global small-cap exposure, Vanguard International Small Companies should serve long-term investors well."

Prineas points out that the fund's benchmark has notable weights to healthcare and technology and only a modest allocation to resources, thereby offering diversification for Australian investors.

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Nicholas Grove is a Morningstar journalist.

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