Global small caps can play diversifying role
Global small cap funds can provide significant diversification benefits to a balanced portfolio, but the strategy's inherent volatility can make more conservative investors uncomfortable, according to Morningstar.
In its wrap-up of the World Small Cap fund category released yesterday, Morningstar reviewed eight strategies that make up 94 per cent of the sector. None of the eight funds reviewed received a 'highly recommended' rating, but three funds - Hunter Hall Global Ethical, Hunter Hall Value Growth and Schroder Global Smaller Companies - were named 'recommended' by Morningstar.
Investors should examine their portfolio's market cap and style characteristics before adding a global small caps strategy, to ensure there is no duplication, according to the Morningstar analysis.
"Investors and advisers need to consider carefully whether exposure to an inherently volatile asset class such as global small caps matches the investor's time horizon and risk tolerance," said Morningstar.
The BlackRock Global Small Cap fund also holds larger cap stocks, which will potentially undo some of the diversification benefits for investors, according the review.
Hedged global small caps have produced better returns than unhedged funds in the category, but they have done so at the cost of greater volatility - making them inferior on a risk/return basis, according to Morningstar.
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