A chart that counts: European Smaller Companies Trust

European smaller companies have historically beaten large caps over different stages of the stock market cycle.

Sometimes you need to see something to believe it.

We can write here repeatedly that smaller companies are a diversifying part of a portfolio – and have historically beaten large caps over different stages of the stock market cycle.

But, the chart below may convey this message more clearly.

European small caps have outperformed large caps in 14 of the last 23 years

Source: Refinitiv DataStream, Janus Henderson Investors Analysis, in Local currency, as at 11 November 2024. Note: Indices used: European Small Caps = MSCI Europe Small Cap Index, European Large Caps = MSCI Europe Large Cap Index, US Equities = S&P 500 Index. Rebased to 100. Past performance does not predict future returns.

The green years are those when European smaller companies outperformed their larger peers. The red are those when they have not.

The first, and most obvious, question this chart throws up is: why have smaller companies done so much worse in the last half decade than they did in the rest of this period?

An extended stretch of ultra-low interest rates were immediately succeeded in 2021 by a period of significant economic uncertainty, a distinctly unfavourable environment for smaller companies. As markets fall and economic growth falters, smaller companies are often the first to suffer. However, historically smaller companies have also been the first to rebound as both markets and economies recover – food for thought.

Investing in European smaller companies

When it comes to investing in smaller companies, for us the chart above sends an even clearer message. That is, that the investing context of the next 2, 5 or 10 years is hard – or impossible – to predict. Rather than attempt to do this, we opt instead to look at individual companies, what they do and how they do it.

We consistently invest in a broad spread of smaller businesses, having examined their finances, operations and management in detail. Our emphasis is on businesses that generate cash: i.e. they sell things or services and actively make money from them. We also look for cases where that profile is underappreciated by the market. These can be in their first years of existence or long-established companies experiencing a turnaround – or indeed anywhere in between.

Most importantly, these companies often operate in niches untouched by their larger peers, making them a unique investment.

Click here to find out more about The European Smaller Companies Trust

Glossary

Diversification

A way of spreading risk by mixing different types of assets/asset classes in a portfolio, on the assumption that these assets will behave differently in any given scenario. Assets with low correlation should provide the most diversification.

Large caps

Well-established companies with a valuation (market capitalisation) above a certain size, eg. $10 billion in the US. It can also be used as a relative term. Large-cap indices, such as the UK’s FTSE 100 or the S&P 500 in the US, track the performance of the largest publicly traded companies, rather than all stocks above a certain size.

Small caps

Companies with a valuation (market capitalisation) within a certain scale, eg. $300 million to $2 billion in the US, although these measures are generally an estimate. Small cap stocks tend to offer the potential for faster growth than their larger peers, but with greater volatility.

Portfolio

A grouping of financial assets such as equities, bonds, commodities, properties or cash. Also often called a ‘fund’.

Disclaimer

Past performance does not predict future returns.

There is no guarantee that past trends will continue, or forecasts will be realised.

Not for onward distribution. Before investing in an investment trust referred to in this document, you should satisfy yourself as to its suitability and the risks involved, you may wish to consult a financial adviser. This is a marketing communication. Please refer to the AIFMD Disclosure document and Annual Report of the AIF before making any final investment decisions. Past performance does not predict future returns. The value of an investment and the income from it can fall as well as rise and you may not get back the amount originally invested. Tax assumptions and reliefs depend upon an investor’s particular circumstances and may change if those circumstances or the law change. Nothing in this document is intended to or should be construed as advice. This document is not a recommendation to sell or purchase any investment. It does not form part of any contract for the sale or purchase of any investment. We may record telephone calls for our mutual protection, to improve customer service and for regulatory record keeping purposes.

Issued in the UK by Janus Henderson Investors. Janus Henderson Investors is the name under which investment products and services are provided by Janus Henderson Investors International Limited (reg no. 3594615), Janus Henderson Investors UK Limited (reg. no. 906355), Janus Henderson Fund Management UK Limited (reg. no. 2678531), (each registered in England and Wales at 201 Bishopsgate, London EC2M 3AE and regulated by the Financial Conduct Authority), Tabula Investment Management Limited (reg. no. 11286661 at 10 Norwich Street, London, United Kingdom, EC4A 1BD and regulated by the Financial Conduct Authority) and Janus Henderson Investors Europe S.A. (reg no. B22848 at 78, Avenue de la Liberté, L-1930 Luxembourg, Luxembourg and regulated by the Commission de Surveillance du Secteur Financier).

Important information

Please read the following important information regarding funds related to this article.

Before investing in an investment trust referred to in this document, you should satisfy yourself as to its suitability and the risks involved, you may wish to consult a financial adviser. This is a marketing communication. Please refer to the AIFMD Disclosure document and Annual Report of the AIF before making any final investment decisions.

Specific risks

If a Company's portfolio is concentrated towards a particular country or geographical region, the investment carries greater risk than a portfolio that is diversified across more countries.
Where the Company invests in assets that are denominated in currencies other than the base currency, the currency exchange rate movements may cause the value of investments to fall as well as rise.
Most of the investments in this portfolio are in smaller companies shares. They may be more difficult to buy and sell, and their share prices may fluctuate more than those of larger companies.
This Company is suitable to be used as one component of several within a diversified investment portfolio. Investors should consider carefully the proportion of their portfolio invested in this Company.
Active management techniques that have worked well in normal market conditions could prove ineffective or negative for performance at other times.
The Company could lose money if a counterparty with which it trades becomes unwilling or unable to meet its obligations to the Company.
Shares can lose value rapidly, and typically involve higher risks than bonds or money market instruments. The value of your investment may fall as a result.
The return on your investment is directly related to the prevailing market price of the Company's shares, which will trade at a varying discount (or premium) relative to the value of the underlying assets of the Company. As a result, losses (or gains) may be higher or lower than those of the Company's assets.
The Company may use gearing (borrowing to invest) as part of its investment strategy. If the Company utilises its ability to gear, the profits and losses incurred by the Company can be greater than those of a Company that does not use gearing.
Using derivatives exposes the Company to risks different from - and potentially greater than - the risks associated with investing directly in securities. It may therefore result in additional loss, which could be significantly greater than the cost of the derivative.
If the Company seeks to minimise risks (such as exchange rate movements), the measures designed to do so may be ineffective, unavailable or negative for performance.

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