Global smaller companies offer long-term potential, Invesco says Go compare with our comparison table

Global smaller companies offer long-term potential, Invesco says

08 December 2010 / by Paul Dicken

With strong performance over the last 15 years smaller companies are expected to thrive as economies shift from recession to recovery, according to investment manager Invesco Perpetual.

Nick Hamilton, head of global equity products at the firm, said historical data showed a recurring pattern of performance in smaller companies after markets had reached a low. In the last three years smaller company equities have outperformed larger company equities with this typically increasing in the latter stages of economic recovery.

Hamilton said a global equity investment portfolio could miss out on some potential growth if did not include some exposure to smaller companies in both developed and emerging markets. Globalisation was likely to ‘broaden and deepen’ the opportunity for small company investing, as well, as smaller companies would be a key part of development in many new economies.

The performance of equities has been partly down to growth, with earnings growth for smaller US companies higher but also more volatile. High earnings growth in mid 2008 had plummeted by early 2009 on the Standard and Poor's 600 small cap index, although remained higher than the S&P 500 large cap index, made up of a large US companies.

Hamilton said a key concern for investment managers was that marginal capital investment decisions made by businesses would not diminish returns. He said smaller companies often had more constraints which led to capital discipline, as well as management having personal stakes in businesses.

“Management interests are generally closely aligned with shareholder interests in small companies. Management of smaller companies tend to hold a significant amount of shares so have a real incentive to succeed,” he added.

Diversification can be added to investment portfolios through exposure to smaller companies.

“We believe that global smaller company investing favours a long term, fundamental stock-picking approach; and for active investors, the under researched nature of the global smaller company market offers an attractive long-term investment opportunity,” he said.

© Fair Investment Company Ltd

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