Although companies will continue to struggle in the near-term, it could still be the “perfect time” to allocate to global small/mid-cap (SMID) funds, according to Bell Asset Management’s chief investment officer (CIO).
Ned Bell said it sounded counterintuitive to be recommending allocations to SMID stocks at a point when earnings are troughing, but that history suggested it was the perfect time.
“You have to think about global SMIDS as playing a growth role in the portfolio, think about it in the context of being a complimentary allocation, alongside large cap growth, emerging markets and even Aussie SMIDS,” Bell said.
According to FE Analytics, the global small/mid cap sector returned an average of 6.24% over the 12 months to 31 May, 2020.
Ophir Global Opportunity (25.94%) was the best returning fund, followed by Ellerston Global Mid Small Unhedged (18.65%), Fairlight Global Small and Mid Cap (17.27%), Prime Value Emerging Opportunities (15.72%) and Bell Global Emerging Companies (11.63%).
One of the advantages of global SMID funds was that they could offer diversity from the major tech players that dominated global large-cap funds.
“You don’t just need to own the large-cap tech stocks for growth, you can find SMID businesses that are growing really well organically,” Bell said.
“They’re not going to grow much this year, but once we come out of the other side of COVID-19, we’ll find those organic growth drivers will come back and these high-quality companies are the ones that are going to rebound fastest.
“One of the dilemmas investors have now when they look at their portfolios is they’ve got huge exposure to IT stocks.
“There’s nothing wrong with that but they now represent much larger proportions of portfolios than what was the case two or three years ago.”
Although the Bell Global Emerging Companies fund allocated around a quarter to the telecom, media and technology sector, it also had at least 20% allocated to the consumer products and healthcare sectors each.
“Investors are asking themselves ‘how can I get growth that isn’t just a like-for-like proxy over what I’ve got in the large cap world?’ And that’s where SMIDs can play that role,” Bell said.
“We’re finding great growing companies in the healthcare and consumer discretionary spaces, so there is a very good complimentary sector argument to be made.”
Joel Connell, Bell senior global equities analyst, said dental orthodontics – which saw a negative impact in the short-term due to lockdowns where it was only allowed to do emergency work – would also bounce back.
