An oft-touted – but often misunderstood – feature of investing in smaller companies is the large and wide-ranging universe of stocks available. What does a diverse universe mean for a fund like The European Smaller Companies Trust?

To set the scene, our definition of a smaller company means those with a market cap of less than €7bn. In Europe, that encompasses around 2000 companies. By comparison, those investing in European large(r) cap companies have around 200 companies to select from.

The impact of having a large pool to fish from emerges in two immediate ways.

1. Niche companies benefitting from global trends

First, the smaller universe is filled with niche companies benefitting from global trends. These offer an alternative “take” on these phenomena. They can be subject to different risks and drivers when compared to larger participants.

They also offer the investor an opportunity to build a diversified but complementary exposure to a single trend, rather than betting it all on one business or being forced to own both a business and its competitor.

Take REPowerEU, the Europe-wide initiative to reduce fossil fuels in the energy mix – with €48bn of funding behind it. The most apparent beneficiaries are larger renewable energy companies. However, the companies that supply them could also benefit.

One example from the smaller companies world is Nexans. It manufactures high voltage cables and associated services. These are essential for converting generated energy to transmitted energy. Elsewhere, DEME Group transports and installs offshore wind turbines. Put simply, someone has to, and DEME has the expertise to do so.

2. Leading companies operating in defined niches

The other side of the ledger is those companies that have become leaders in a small, defined market. This means that it is harder for larger companies to enter and build market share.

A clear example is DFDS, the northern European shipping operator. It runs ferries and freight operations primarily through the Baltic Sea, North Sea and English Channel. We define it as a mature business, which has a resilient, captive market.

A very different case study is Corticiera Amorim. The Portuguese company is one of the world’s largest cork processors. Wine is a resilient market, so the demand for the company’s core product is relatively predictable. However, cork can also be used in insulation and as a floor covering. This offers potential future growth areas for the business.

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

Past performance does not predict future returns.

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.

Disclaimer

References made to individual securities do not constitute a recommendation to buy, sell or hold any security, investment strategy or market sector, and should not be assumed to be profitable. Janus Henderson Investors, its affiliated advisor, or its employees, may have a position in the securities mentioned.

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