Ian Cowie: this trend is the friend of long-term investors

2nd December 2021 09:30

Four of the top five performing investment trust sectors over the past 18 years specialise in finding tomorrow’s winners.

Smaller companies tend to deliver the biggest returns to long-term investors, surprising new research demonstrates. Sad to say, apart from a few outstanding exceptions - such as Fevertree Drinks (LSE:FEVR) or ITM Power (LSE:ITM) - these businesses’ names are often unfamiliar to this DIY investor.

Therefore, the most sensible way to access the smaller end of the corporate scale anywhere in the world is via professionally managed investment companies, where diversified portfolios can help to diminish bigger risks among smaller firms. Remember, though, that not every acorn grows into an oak.

Now new research from the Association of Investment Companies (AIC) demonstrates how this approach has paid off in the past. It isn’t necessarily a guide to the future - but you knew that already, didn’t you? However, it could prove useful for anyone seeking to help young friends and family this Christmas with a financial gift.

For example, if anyone had invested £1,000 in the average investment company 18 years ago, it would now be worth £7,740 according to statisticians Morningstar, via the AIC.

But if £1,000 had been invested over the same period in the average share in the AIC’s ‘UK Smaller Companies’ sector, it would have grown to £10,376. Perhaps even more surprisingly, if the same sum was invested in the ‘European Smaller Companies’ sector, the average return was £11,496 - that’s 48% more than the industry-wide average.

Incidentally, the ‘Global Smaller Companies’ sector wasn’t far behind with an average return of £10,019 and ‘Asia Pacific Smaller Companies’ delivered £9,890. So these corporate tiddlers delivered four out of the top five AIC sectors’ weighted average returns over the last 18 years, according to Morningstar. For completeness, I should add that ‘Biotechnology & Healthcare’ ranked third-best sector overall with a total return of £10,265.

Never mind the averages, though, which individual investment companies did best of all? Taking this in ascending order for purposes of dramatic tension - you will have to imagine the drum roll for yourself - Aberdeen Standard Asia Focus (LSE:AAS), managed by veteran investor Hugh Young, is the top-performing investment company in the AIC’s ‘Asia Pacific Smaller Companies’ sector with a total return of £11,601 on an initial investment of £1,000 over the last 18 years. This fund with total assets of more than £555 million has beaten its sector average over the last year, five-year and 10-year periods but continues to trade at a 13% discount to its net asset value (NAV).

Edinburgh Worldwide (LSE:EWI) leads the ‘Global Smaller Companies’ sector with a total return of £13,021 on the same basis as above. While £1.3 billion EWI trounced its peers over both the medium- and long-term periods mentioned above, it has had a bad year in which it shrank shareholders’ capital by 3.5% but continues to trade at a 2.2% premium to NAV.

abrdn UK Smaller Companies Growth (LSE:AUSC) with £818 million total assets leads its sector with eye-stretching returns of £20,263 on the usual basis but continues to trade at a 6.5% discount to NAV.

At the risk of causing confusion, that turns out to be even better than the top-performing investment company in the AIC’s best-performing sector, which is Montanaro European Smaller Companies (LSE:MTE), where the total return was £15,963. MTE has assets under management of £390 million and trades at a modest 1.7% premium to NAV.

For comparison, my own recent investment in continental smaller companies via European Assets Trust (LSE:EAT) lags far behind with a total return of £9,517 on the same basis. Similarly, my long-term shareholdings in the ‘Japanese Smaller Companies’ sector, Baillie Gifford Shin Nippon (LSE:BGS) turned £1,000 into £9,711 while the self-descriptive JPMorgan US Smaller Companies (LSE:JUSC) delivered £8,054.

What it all boils down to is a practical way to grow wealth from small beginnings into large capital sums over long periods of time. Or, as Annabel Brodie-Smith, director of communications at the AIC, told me: “This Christmas we’re all hoping we can be together with family and loved ones after the disruption of last year. But with the financial demands on young people becoming ever greater, parents and grandparents might want to consider investing for the long term to give their child a head start for the future.”

Anyone who has been investing in stock markets for more than a short time now must be sitting on substantial gains, despite recent setbacks. So what better way to give thanks for our good fortune than with a financial Christmas present of shares for children or grandchildren? It could be the gift that keeps giving!

Ian Cowie is a freelance contributor and not a direct employee of interactive investor.

Ian Cowie is a shareholder in Baillie Gifford Shin Nippon (BGS), European Assets Trust (EAT), Fevertree Drinks (FEVR), ITM Power (ITM) and JPMorgan US Smaller Companies (JUSC) among other investments in a diversified global portfolio.

These articles are provided for information purposes only. Occasionally, an opinion about whether to buy or sell a specific investment may be provided by third parties. The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.

Full performance can be found on the company or index summary page on the interactive investor website. Simply click on the company's or index name highlighted in the article.

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