Small cap investing and what factors may prompt a recovery

Inflation had disrupted equity markets even before war hit

Equity markets had been under pressure right from the start of the year from disrupted supply chains, rising prices and higher interest rates. The war in Ukraine is a tragic event that is hugely destructive and poses far-reaching risks. In terms of markets and economies, the war has brought geopolitical risks while compounding the existing inflationary pressures.

Growth shares have been hit hardest, while ‘bond proxy’ investments are at risk from rising interest rates. Broadly, small-cap equities fit into the ‘growth’ section of the market while being more sensitive to investor risk appetite. Underperformance of small caps at the beginning of 2022, however, should be set in context of superior returns over the last 20 years.

A period of higher inflation may also be supportive for the asset class as data from the 1970s demonstrated how smaller companies can outperform in a period of inflation. It is worth remembering however, that the composition of equity markets was very different from now and developed economies haven’t had to deal with sustained inflation for a considerable period.

We focus on talking to the individual companies to find opportunities

While it is important to understand the top-down economic and market forces it can be dangerous to think purely in general terms. Small companies can successfully operate in niche markets, be less subject to broader trends and be more nimble than larger operations. As a result, it makes sense to focus on understanding an individual company’s ability to deliver in the current environment. Talking to management to really grasp the opportunities and challenges they face is key. In recent weeks we’ve checked in with many of our investee companies, exploring how the conflict has impacted their business and seeking reassurance over the safety of staff. These conversations showed that that the experience of Covid-19 had encouraged many companies to actively manage their supply chains to mitigate the knock-on effects from unpredictable events.

Portfolio activity has been limited

In terms of portfolio activity, we’ve not had to make the fundamental shifts in the same way we did when Covid-19 emerged – something that suggests events in 2022 haven’t derailed the broader trend of global economic recovery. We have made some smaller adjustments, however. For example, we sold glass-bottle maker Vidrala at the beginning of the year from the European Assets Trust. This energy-intensive manufacturer had not hedged its energy costs, so a 10% price increase was insufficient to protect profitability and industry-leading margins left little scope elsewhere. By contrast, we added to the holding of Fluidra after the shares sold off with the market fall, as this swimming-pool-equipment manufacturer has end-markets that have been resilient and price-insensitive.

Small caps are positioned for a recovery.

So, will small caps continue to lag in relative terms or are they set to regain ground? On balance, we see several reasons to be cautiously optimistic.

Risk appetite rebound

The course of the war is currently unknowable but, equally, any de-escalation allows scope for a recovery in markets and economies.

Investment-driven growth recovery

There is an opportunity for increased investment to drive growth, as governments seek to build back better in areas such as energy independence and the shift to a more sustainable economic model. With company balance sheets strong, we should expect increased investment in strengthening capacity and reinforcing supply chains.

M&A returns

Strong corporate balance sheets should also encourage a resumption of merger and acquisition activity, which has been suspended in face of the uncertainties of war.

Active management

Broad market moves will leave opportunities for selective investment in under-researched smaller companies.

30 March 2022

Key topics

Investment Trust

Risk Disclaimer

The value of investments and any income derived from them can go down as well as up as a result of market or currency movements and investors may not get back the original amount invested.

Views and opinions expressed by individual authors do not necessarily represent those of Columbia Threadneedle Investments.

Related Insights

27 September 2024

Equity

Equity, Investment Trusts

Francis Ellison

Client Portfolio Manager

European Smaller Companies – European Assets Trust update

With inflation falling, rates peaking and corporate earnings growing, small cap valuations are attractive.

18 July 2024

Equity - Global

Nish Patel

Director, Portfolio Manager, Global Small Cap

Global small caps – preparing for a new cycle

After a long period of underperformance, a new cycle may be emerging in smaller companies. If history is a guide the initial recovery should be strong.

Watch time - 40 mins

18 July 2024

Alternatives - Private Equity

Private Equity

Hamish Mair, BSc, MBA, ASIP

Managing Director and Head of Private Equity

A consciously high UK exposure

With a 40%+ weighting in the UK and around 35% in Europe, our superior returns show you don’t always have to travel far to access growth in interesting and innovative small to medium-sized companies.

Read time - 3 mins

true

Risk Disclaimer

The value of investments and any income derived from them can go down as well as up as a result of market or currency movements and investors may not get back the original amount invested.

Views and opinions expressed by individual authors do not necessarily represent those of Columbia Threadneedle Investments.

Investment approach

Teamwork defines us and is fundamental to our investment approach, which is structured to facilitate the generation, assessment and implementation of good, strong investment ideas for our portfolios.

Funds and Prices

Columbia Threadneedle Investments has a comprehensive range of investment funds catering for a broad range of objectives.

Our Capabilities

We offer a broad range of actively managed investment strategies and solutions covering global, regional and domestic markets and asset classes.

Please confirm a few details about yourself to visit your preference centre

*Mandatory fields

Something went wrong, please try again

Thank you. You can now visit your preference centre to choose which insights you would like to receive by email.

Visit preference centre

To view and control which insights you receive from us by email, please visit your preference centre.

Visit preference centre

CT Property Trust- Fund Manager Update

Sed ut perspiciatis unde omnis iste natus error sit voluptatem accusantium doloremque laudantium

Small Caps so far in 2022 – is this a longer-term opportunity?

Inflation had disrupted equity markets even before war hit

We focus on talking to the individual companies to find opportunities

Portfolio activity has been limited

Small caps are positioned for a recovery.

Risk Disclaimer

Related Insights

European Smaller Companies – European Assets Trust update

Global small caps – preparing for a new cycle

A consciously high UK exposure

Risk Disclaimer

You may also like

Investment approach

Funds and Prices

Our Capabilities

Please confirm a few details about yourself to visit your preference centre

Thank you. You can now visit your preference centre to choose which insights you would like to receive by email.

To view and control which insights you receive from us by email, please visit your preference centre.

CT Property Trust- Fund Manager Update

Small Caps so far in 2022 – is this a longer-term opportunity?

Inflation had disrupted equity markets even before war hit​

We focus on talking to the individual companies to find opportunities​

Portfolio activity has been limited

Small caps are positioned for a recovery.

Risk Disclaimer

Related Insights

European Smaller Companies – European Assets Trust update

Global small caps – preparing for a new cycle

A consciously high UK exposure

Risk Disclaimer

You may also like

Investment approach

Funds and Prices

Our Capabilities

Please confirm a few details about yourself to visit your preference centre

Thank you. You can now visit your preference centre to choose which insights you would like to receive by email.

To view and control which insights you receive from us by email, please visit your preference centre.

CT Property Trust- Fund Manager Update

Inflation had disrupted equity markets even before war hit

We focus on talking to the individual companies to find opportunities