Among the themes to watch out for within the developed markets small-cap space are the healthcare, food and beverage as well as automations sectors.
Citywire A-rated Andrew Paisley, deputy head of smaller companies for UK and Europe at Aberdeen Standard Investments, told Citywire Asia there are a number of high-quality, well-managed companies that are at the forefront of innovation within the healthcare sector.
These companies, which provides medical devices and treatments, are leading the innovation in terms of how healthcare is administered and delivered.
Paisley said he also likes the food and beverage sector, where a number of companies are exploiting how technology is changing how consumers order, as well as consume food.
Meanwhile, the rise of automation also leads to interesting opportunities across a number of industries, such as autos and home security.
Although Aberdeen Standard is a bottom-up stock picker, these are a number of sectors that Paisley feels are offering attractive stock-specific opportunities at present.
‘Our bottom-up process looks for higher-quality companies that we believe can outperform over the long-term,’ Paisley, who manages the SLI Glo SICAV European Smaller Companies A EUR fund, said.
‘We look for companies that can deliver sustainable growth in a wide variety of economic conditions,’ he said.
These companies tend to be lower-risk, which means small-cap developed market funds are good way of getting lower-risk exposure to the asset class, he added.
Paisley said the demand for small-cap developed market funds are broadly consistent across Asia and between investor groups.
‘Over recent years, clients’ feedback have indicated a growing level of demand for smaller companies exposure within investors’ portfolios.’
This is evidenced by the launch of high profile passive products that aim to provide a smaller companies solution, he added.
‘While we welcome increased interest in the asset class, we believe that clients can achieve better outcomes through taking an active approach,’ Paisley said.
Over six months to the end of March, Aberdeen Standard’s smaller company suite of funds have seen positive performance.
The performance of the SLI Glo SICAV European Smaller Companies A EUR fund is primarily driven by stock-specific risk.
In the last 12-months, the SLI Glo SICAV European Smaller Companies A EUR fund has benefited from long-term conviction holdings in companies such as Fever-Tree Drinks, Fenner and Nemetschek as a result of our stock specific insights.
Meanwhile, the fund has also exited its holdings in Dignity Finance, a funeral operator.
‘The company has faced unexpected pricing pressures in an industry that has traditionally enjoyed strong pricing power,’ he said.
As a result, Dignity Finance has had a negative impact on the fund’s performance in the last 12 months.
The recent correction in markets highlights that investors are becoming more sensitive to the risk of interest rate increases and a potential trade war between China and the US, Paisley said.
These factors bring with them a return to more volatile market conditions.
‘With that in mind, we believe that our focus on high-quality companies with good growth prospects and momentum is correct,’ Paisley said.
‘We remain averse to low-quality speculative and loss-making companies.’