Small offers diversification as well as beauty

Standard Life Investments believes that smaller companies present investors with a diverse and relatively under-researched investment opportunity.

In the latest edition of Global Outlook, Standard Life Investments examines how smaller companies are key beneficiaries of changes within the global economy, and considers how this creates opportunities for investors.

Smaller capitalised and often undervalued relative to their growth prospects, these stocks offer investors the potential for substantial returns that are more difficult to achieve from larger companies that are perceived to be in a more mature phase of development.

Harry Nimmo, investment director, smaller companies, at Standard Life Investments, said, "It is an ideal time to consider global smaller company investment. The sector is a vast but largely underresearched investment territory.

“The key for investors is how to identify, at an early stage, those small and mid-sized firms successful enough to grow into the larger businesses of the future. The growth potential of smaller companies can, in part, be attributed to their lower correlation to global economic growth trends.

“Unlike their large company counterparts, which can be overwhelmed by broader macro developments, smaller companies can continue to deliver strong earnings growth regardless of what is happening in the wider economy. Such firms often occupy niche positions in specialist and structural growth markets.

“These trends, such as globalisation or technological improvements, are often longer in duration than the standard economic cycles."

Harry Nimmo continued, "The current economic and business cycle is likely to remain very different from ones that have gone before. The assumptions which investors have traditionally made in relation to the size of a company have been challenged on a number of levels.

“Some larger companies have proven just as susceptible as smaller firms to the risks associated with, for example, the collapse of the credit bubble. As many governments are fiscally constrained there may be a temptation for them to raise tax revenues from cash rich larger companies.

“Additionally, there is always a temptation to apply a harsher regulator environment as a way to compensate the electorate for a difficult economic environment. This is politically easier to impose on larger rather than smaller companies.

"A related reason for governments to target larger companies is that they realise small and medium enterprises (SMEs) are typically the part of the corporate sector that deliver jobs growth in economies as they start to recover - something, more than ever, needed in the current environment. Another on-going driver is the increased use of technology, which again is more easily implemented by smaller companies, as they can be nimbler at adjusting their business models.

"Of course, the small companies' universe can be subject to bouts of relative weakness in difficult market conditions when risk aversion is the watchword. However, for companies that occupy niche positions in structural growth or specialist sectors the long-term outlook remains positive."