Investing in smaller companies is unlikely to provide good returns becuase most of the companies are...
Investing in smaller companies is unlikely to provide good returns becuase most of the companies are small for a reason - they are "bad" companies, says Nick Train, fund manager for Finsbury Growth Trust investment trust.
Train told a roundtable panel, organised by the Association of Investment Trust Companies, that not all smaller companies are poor investments.
However, as an asset class, he says that he does not believe they can "cut it".
Train says people buying shares in smaller companies were seen as making a great investment in the 1980s, when small-caps outperformed large-caps.
But he says this is no longer the case. Smaller companies in the UK and the US have started to underperform, Train says.
In direct contrast, Gervais Williams, Gartmore senior investment manager & head of UK smaller companies, says that this is a "seriously" good period for small companies.
Smaller companies are more "stable" in the sense that they are more focused on the domestic economy. This makes them less prone to the effects of volatility in sterling and the dollar, Williams says.
Fledgling companies are also significantly more "cheaply" valued than larger companies, says Williams. He adds that this "has helped to drive the consensus expectation that smaller companies will see higher levels of both earnings and dividend growth than larger companies during the coming twelve months."
"The fledgling universe is frequently overlooked," he says.
"However, the high level of fledgling company directors buying shares in their own companies reinforces the view that this area of the market is relatively attractive, particularly over a period when markets have been so affected by uncertainty and turbulence."
"Takeover levels have also risen from the low point of 2002, with nearly 10% of fledgling companies having been acquired (on an annual basis) so far in 2003. This is significant as it suggests that both corporates and venture capitalists still view the area with keen interest," he adds.
Train rejects the "smaller company effect" and says that it is at best random, and may not even have existed.
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