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Invesco Global Smaller Companies Equity FundMarch 2016
Product Director John Botham
This marketing document is exclusively for use by Professional Clientsand Financial Advisers in Continental Europe and Qualified Investorsin Switzerland. This document is not for consumer use, please do notredistribute.
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Contents
2
Fund overview
Portfolio structure, philosophy and strategy
Investment process
Positioning and performance
Appendix- Invesco Core EAFE Small Cap Team- Invesco Global Smaller Companies Group- Invesco Small Cap Equity Team (US team)- The role of ESG- Risk management- The case for Global Small Cap investing
Fund overview
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Invesco Global Smaller Companies Equity FundOverview
4
Past performance is not a guide to future performance.
Source: Invesco as at 31 December 2015. 1The Invesco Global Smaller Companies Group comprises CIO Nick Mustoe, Investment Strategist Martin Weiss, Product Manager Arwell Green and specialist regional Fund Managers Jonathan Brown, Paul Chesson, Juliet Ellis, Erik Esselink, Ian Hargreaves and Dean Newman. Invesco has managed the fund since 1 June 2010. Fund performance figures are shown in USD on a mid-to-mid basis, inclusive of reinvested income and gross of the ongoing charges and portfolio transaction costs. The figures do not reflect the entry charge paid by individual investors. Net returns will be lower. Please see Net Performance slide for the impact of all fund charges. Benchmark source: Invesco, net return, in USD. Please refer to the prospectus for details on fees and charges. Not all share classes of this fund may be available for public sale in all jurisdictions and not all share classes are the same nor do they necessarily suit every investor.There may be differences in fee structures, in minimum investment amounts, etc. Please check the most recent version of the fund prospectus in relation to the criteria for the individual share classes and contact your local Invesco office for full details of the fund registration status in your jurisdiction. *ESG/SRI = Environmental, Social & Governance/Sustainable & Responsible Impact.
-10
0
10
20
30
40
50
60
70
6 months 1 year 3 years 5 years
Invesco Global Smaller Companies Equity FundMSCI World Small Cap Net Return index
Invesco Global Smaller Companies Equity Fund Cumulative returns, gross of fees in USD (%)
Investment approach and universe
Active valuation-led approach that seeks to invest in undervalued companies that are managed in a sustainable fashion. The strategy aims to outperform it’s benchmark on a 3 year rolling basis.The investment universe comprises all smaller companies listed in developed markets.
Benchmark MSCI World Small Cap Net Return indexFund size US$137.6 million Fund manager Fund managed by Nick Mustoe (lead) and Invesco Global
Smaller Companies Group1. Erik Esselink (EAFE sub-portfolio) and Juliet Ellis (US sub-portfolio) are supported by the remaining members of the Invesco Global Smaller Companies Group
ESG/SRI approach
Integrated ESG/SRI* approach embedded in investment process.
No. of holdings Circa. 200 stocksFund launch September, 2011
On 1 June 2010, following Invesco Ltd.’s acquisition of Morgan Stanley’s retail asset management business (including Van Kampen Investments), the Morgan Stanley Global Small Cap Value Fund transferred to Invesco Perpetual’s management. On 6 September 2010, the Morgan Stanley Global Small Cap Value Fund became the Invesco Global Small Cap Value Fund. On 30 September 2011, the Invesco Global Small Cap Value Fund was amalgamated into the newly-created Invesco Global Smaller Companies Equity Fund.
Portfolio structure, philosophy and strategy
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Portfolio structureTwo expertly managed sub-portfolios
6
1Fund managed by Nick Mustoe (lead) and Invesco Global Smaller Companies Group which comprises CIO Nick Mustoe, Investment Strategist Martin Weiss, Product Manager Arwell Green and specialist regional Fund Managers Jonathan Brown, Paul Chesson, Juliet Ellis, Erik Esselink, Ian Hargreaves and Dean Newman.2EAFE = Europe, Australasia and Far East.
EAFE1 smaller companies portfolio
Circa 100 stocks
US smaller companies portfolio
Circa 100 stocks
Invesco Global Smaller Companies
Equity Fund1
Circa 200 stocks
Erik Esselink
Juliet Ellis
Active asset allocation between EAFE2 and the US is valuation and opportunity driven and is influenced by recommendations from the Invesco Global Smaller Companies Group. Underlying sub-portfolio regional allocation is a result of our bottom-up approach.
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Specialist sub-portfolio managersErik Esselink & Juliet Ellis
7
Erik EsselinkEuropean Small Cap Equities Fund Manager at Invesco Based in Atlanta GA, Erik manages a number of Equity strategies for Invesco. In Atlanta Erik is part of the Global Core Equity group, but remains a member of both the European Equity group and the Global Smaller Companies group in Henley (UK). Erik spends about 2 months a year in Henley. His career started in 1997 with ING Barings in Amsterdam, where he worked within the Institutional Equity Sales team for three years, specialising in Dutch equities. In 2000, Erik worked with Morgan Stanley, most recently as a pan European small and mid cap specialist salesperson and covered their institutional equity sales into the Benelux region. He joined our company in October 2007. Erik graduated from the Rotterdam School of Economics (HES) where he studied Commercial Economics. He is fluent in English and Dutch with a working knowledge of French and German.
Juliet Ellis, CFA*
CIO of Invesco’s Domestic Growth Investment Management UnitJuliet Ellis, Managing Director, is Senior Portfolio Manager for a Small Cap Equity Portfolio and a Small Cap Growth Portfolio. She also serves as Chief Investment Officer for Invesco’s U.S. Growth Investment Management Unit. Juliet has been a lead portfolio manager for Small Cap asset strategies since 1993. Prior to joining Invesco in 2004, Juliet was a Managing Director with JPMorgan Fleming Asset Management, where she served as Senior Portfolio Manager of JPMorgan’s Small Cap Equity and Small Cap Growth Strategies. At JPMorgan, she was responsible for the management of more than US$2 billion in assets, including mutual funds, sub-advised portfolios, and institutional separate account portfolios. Juliet began her investment career in 1981 as a financial consultant with Merrill Lynch. She joined JPMorgan in 1987 as a Senior Equity Analyst, where she also served as Assistant Portfolio Manager and Director of Equity Research, before being promoted to Senior Portfolio Manager in 1993 and Managing Director in 2000. Juliet graduated Cum Laude and is a Phi Beta Kappa graduate of Indiana University with a Bachelor of Arts degree in Economics and Political Science. She is also a CFA charter holder.
Erik Esselink is focused on EAFE smaller companies – he is involved with the following:- A Continental European Small Cap Equity
strategy (lead manager)
- Global and EAFE Portfolios (lead manager)
- An EAFE global smaller companies strategy (lead manager)
- Europe ex. UK domiciled sub-portfolio for Global Smaller Companies (all markets) strategy
- Pan European Focus strategy (co-manager)
Juliet Ellis is focused on US smaller companies – she is involved with the following:
- A Small Cap Equity strategy (lead manager)
- A Small Cap Growth strategy (lead manager)
- US sub-portfolio for UK domiciled Global Smaller Companies (all markets) strategy
Source: Invesco as at 31 December 2015. *Chartered Financial Analyst.
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Investment philosophy 1
We believe that:
Companies with high quality earnings growth outperform over time
Market inefficiencies provide opportunities to buy mispriced securities
Global smaller companies investors benefit from regional diversification and stock diversification
Valuation is a key determinant of future performance
We are active, long-term investors. As such, we seek to invest in companies that are managed in a sustainable fashion, respecting both the environment and society in which they operate. Regular engagement with company management is integral to our process.
8
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Investment philosophy 2
High Quality Operating Businesses– Uniqueness of market position– Generating high and sustainable returns on capital– Risk of new entrants– Substitution risk
Good stewards of capital– Management track record of capital allocation
Attractive valuation– Based on multiple valuation factors
9
What are we looking for from the companies we invest in
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Investment strategyConsiderable expertise, multiple inputs
10
For illustrative purposes only.
EAFE
Companies with high and sustainable returns at attractive valuations.
US
Companies with high and sustainable growth at attractive valuations
Pricing anomalies
Opportunistic investments to exploit valuation
opportunities
Juliet Ellis
Invesco US Small Cap
Equity Team
6 US specialists
US/EAFE asset allocationLead Portfolio Manager, influenced by Invesco Global Smaller Companies Group
Erik Esselink
Supported by Core EAFE Small Cap
Group and the IP Global Smaller
companies Group
Investment process
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Investment processOverview
12
For illustrative purposes only.
A portfolio of circa 200 names
Typical inputs include: Best risk/reward
opportunities Total portfolio
consideration Multi-level system of risk
management which promotes fund manager accountability
Rigorous financial analysis.
Typical inputs include: Annual reports Management meetings ESG/SRI analysis Industry experts Sell side analyst meetings
Fundamental research
Result:- Formulate investment
thesis - Set price target- Determine downside risk- Investment decision
All listed developed market smaller companies, both on and off benchmark
Investment universe
Quantitative screens of the investment universe Proprietary and 3rd party
Global Smaller Companies Group Regional fund manager
ideas
Trusted external parties Selective use of brokers Independent research
Result:- Identifies attractive
candidates- Continuous flow of ideas,
prioritised on ‘watchlist’
Idea generation Portfolio construction & risk management
Result: - Optimal portfolio of
global smaller companies
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Investment process Idea generation 1
13
For illustrative purposes only.
Continuously prioritised watch list for fundamental research
Screening tools
Sell-side analysts &
independent research
Global Smaller
Companies Group
Sources include:
Screening tools set to our specifications- Custom quant model
- Fundamentals
- Valuation
- Timeliness
Regional Specialists and Global Smaller Companies Group- Regional specialists undertake
hundreds of annual research trips and thousands of company meetings
A concentrated network of sell-side analysts, strategists and independent research
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Investment processIdea generation 2
14
For illustrative purposes only.
Watch List
Steady high return on capital generatorsCompanies with strong, long-term business models with robust cashflow generation, and a proven capital allocation record.
Change in return on capital profileStructural and/or cyclical changes in business model providing potential for earnings growth and return on capital profile
Pricing anomaliesCompanies with significant potential for capital appreciation based on stock specific reasons.
Stock specific ideas to be considered include the following characteristics:
Our goal is to have a constant flow of new ideas
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Investment processFundamental research
15
Our research must generate an information advantage in order to be valuable.
For illustrative purposes only.
Business analysis and due diligence
Assess the key drivers and future prospects of the business Risks and sensitivities of the various business
units Assess the future sustainability of return on
capital of the business units
Financial analysis and capital allocation
Analysis of historical return on capital, typically over the last ten years Subjective assessment on management’s future
capital allocation discipline Develop detailed financial models of earnings,
balance sheet and cash flow.
ESG/SRI criteria analysis
As part of the business analysis: We consider the current and potential environmental and social impacts of the company’s operations We regularly engage with companies, aiming to
meet twice a year
Company valuation
Summary valuation models are constructed for candidate investments Focus on the relationship between the
sustainable return on capital employed and the valuation An upside/downside valuation target
Formulates investment thesis.
Investment decision
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Investment processPortfolio construction
16
For illustrative purposes only.
Disciplined construction balances structural stability with flexibility to find attractive opportunities.
Selected Stocks
Limits on active industry group weights to ensure effective diversification Applies risk-
reward focus to active weighting decisions
Diversification by Sector
Result: Helps manage non stock-specific risk
Positions sold due to: Investment thesis
no longer valid Price target
reached Timeliness profile
deteriorates Better alternative
has arisen
Sell Discipline
Result: Focuses capital on high-conviction holdings
Historically low turnover
Stock weightings are conviction led, based on potential risk-adjusted upside. Portfolio is diversified with the largest holdings typically circa 1.25%
Diversification by Security
Result: Helps manage risk by limiting concentration, controlling costs
Discipline helps ensure diversification with no unintended concentrations.
Risk MonitoringCIO Challenge
Portfolio
Attractive given: Fundamentals Valuation Timeliness Outlook Risks
Stocks must have absolute upside potential - we do not buy stocks for exposure/ benchmark reasons
Selected Stocks
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Investment processComprehensive risk management
Independent Risk Function
Global Performance and Risk Management Team
CIO Challenge– Adherence to philosophy and
process– Scenario modelling – Assesses conviction, and
rationale for holdings– Portfolio behavior under
different market conditions
17
For illustrative purposes only.
Positioning and performance
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Invesco Global Smaller Companies Equity FundRegional weightings
19
Source: Invesco as at 31 December 2015. Portfolio characteristics are subject to change without notice.
0
2
4
6
8
10
12
14
16
Fran
ce
Ital
y
Japa
n
Net
herlan
ds
Irel
and
Can
ada
Aus
tral
ia
Spa
in
Ger
man
y
Port
ugal
Taiw
an
Rus
sia
Uni
ted
Kin
gdom
Aus
tria
Den
mar
k
Finl
and
Hon
g Kon
g
Sw
itzer
land
Gre
ece
Luxe
mbo
urg
Nor
way
Bel
gium
EAFE sub-portfolio MSCI World Small Cap
EAFE sub-portfolio breakdown (%)
44.0
56.0
70.0
30.0
EAFE
US
0 10 20 30 40 50 60 70 80
Sub-portfolios
MSCI World Small Cap index
Total portfolio breakdown (%)
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Invesco Global Smaller Companies Equity FundSector weightings
20
Sector Fund(%)
Active weight MSCI World Small Cap index (%)
Consumer Discretionary 20.0 15.1
Consumer Staples 9.1 4.7
Industrials 20.7 17.3
Telecommunication Services 1.4 1.0
Energy 3.5 3.2
Health Care 8.9 10.9
Materials 4.5 6.6
Utilities 0.8 3.3
Financials 21.7 24.6
Information Technology 9.2 13.3
4.90
4.40
3.40
0.40
0.30
-2.00
-2.10
-2.50
-2.90
-4.10
Source: Invesco as at 31 December 2015. There is no guarantee that these sector weightings will be held by an Invesco fund in the future. Numbers are subject to rounding.
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Invesco Global Smaller Companies Equity FundTop ten holdings
21
Stocks Country Fund(%)
MSCI World Small Cap index (%)
Galp Energia Portugal 1.52 0.00
Cocokara Fine Holdings Japan 1.48 0.02
Hibernia REIT Ireland 1.45 0.02
ASICS Corp Japan 1.43 0.00
Criteo France 1.37 0.00
Irish Residential Properties Ireland 1.35 0.00
Nissan Chemical Industries Japan 1.33 0.05
Treasury Wine Estates Australia 1.32 0.00
Europcar Promesses Japan 1.30 0.02
Refresco Gerber Netherlands 1.30 0.02
Source: Invesco as at 31 December2015. There is no guarantee that these securities will be held by an Invesco fund in the future. For illustrative purposes only. Numbers are subject to rounding. This is not investment advice for buying/holding/selling shares of the above mentioned companies.
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80
90
100
110
120
130
140
Jan
15
Feb
15
Mar
15
Apr
15
May
15
Jun
15
Jul 1
5
Aug
15
Sep
15
Oct
15
Nov
15
Dec
15
Jan
16
Feb
16
Investment process in actionStock example: A US ski resort operator
22
Source: Invesco, Bloomberg 23 February 2016. This is not investment advice for buying/holding/selling shares of the above mentioned companies. For illustrative purposes only. This marketing material is not subject to German regulatory requirements that ensure impartiality of financial analysis. Therefore, the prohibition of trading before the release of financial analysis does not apply.
Share price in USD High quality ski resort assets have enabled the company to attain strong pricing power
Increased geographic diversity helped to minimise weather risk, summer development program help to reduce seasonality
Strong balance sheet
Investment thesis based upon rerating potential and strong disposable income trends for US consumers
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4
5
6
7
8
9
10
Feb
15
Mar
15
Apr
15
May
15
Jun
15
Jul 1
5
Aug
15
Sep
15
Oct
15
Nov
15
Dec
15
Jan
16
Feb
16
Investment process in actionStock example: An Australian wine producer
23
Source: Invesco, Bloomberg 23 February 2016. This is not investment advice for buying/holding/selling shares of the above mentioned companies. For illustrative purposes only. This marketing material is not subject to German regulatory requirements that ensure impartiality of financial analysis. Therefore, the prohibition of trading before the release of financial analysis does not apply.
Share price in AUD since 2 February 2015 till 23. February 2016 One of the largest pure play wine
companies in the world
Successfully moving product slate upmarket to higher price points which helped to grow margins
Strong growth in Asia, particularly China where wine penetration low
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Invesco Global Smaller Companies Equity Fund Gross returns
24
Calendar year returns (%) 1 Jan – 31 May 2010
1 June – 31 Dec 2010**
2011 2012 2013 2014 2015
Invesco Global Smaller Companies Equity Fund
1.25 22.05 -11.37 20.31 46.13 -1.32 9.48
MSCI World Small cap index 0.97 24.91 -9.06 17.55 32.38 1.90 -0.31
Out/Underperformance +0.28 -2.86 -2.21 +2.76 +13.75 -3.22 +9.79
Annualised returns* (%) 3 month 6 months 1 year 3 years 5 years
Invesco Global Smaller Companies Equity Fund8.39 -0.55 9.48 16.44 10.98
MSCI World Small cap index4.23 -5.92 -0.31 10.38 7.53
Out/Underperformance+4.16 +5.37 +9.79 +6.06 +3.45
Past performance is not a guide to future performance.Source: Invesco as at 31 December 2015. *Periods greater than one year. **Invesco has managed the fund since 1 June 2010. Fund performance figures are shown in USD on a mid-to-mid basis, inclusive of reinvested income and gross of the ongoing charges and portfolio transaction costs. The figures do not reflect the entry charge paid by individual investors. Net returns will be lower. Benchmark source: Invesco, net return, in USD. Please see Net Performance on the following slide for the impact of all fund charges, including the annual management charge. Please refer to the prospectus for details on fees and charges.
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Invesco Global Smaller Companies Equity Fund Net returns
25
Past performance is not a guide to future performance.Source: Morningstar © 2015 as at 31 December 2015. * Periods greater than one year. **Invesco has managed the fund since 1 June 2010. Fund and sector performance figures are shown for the A (Acc) share class in USD on a mid-to-mid basis, inclusive of gross reinvested income and net of the ongoing charges and portfolio transaction costs. The figures do not reflect the entry charge paid by individual investors. Benchmark source: Invesco, net return, in USD. Please refer to the prospectus for details on fees and charges.
Annualised returns* (%) 3 month 6 months 1 year 3 years 5 years
Invesco Global Smaller Companies Equity Fund7.85 -1.55 7.29 14.09 8.68
MSCI World Small cap index4.23 -5.92 -0.31 10.38 7.53
Out/Underperformance+3.62 +4.37 +7.60 +3.71 +1.15
Calendar year returns (%) 1 Jan – 31 May 2010
1 June – 31 Dec 2010**
2011 2012 2013 2014 2015
Invesco Global Smaller Companies Equity Fund
0.61 21.06 -12.59 18.76 43.13 -3.29 7.29
MSCI World Small cap index 0.97 24.91 -9.06 17.55 32.38 1.90 -0.31
Out/Underperformance -0.36 -3.85 -3.53 +1.21 +10.75 -5.19 +7.60
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Invesco Global Smaller Companies Equity Fund Risk statistics
26
Past performance is not a guide to future returns.Source: Invesco as at 31 December 2015. Fund performance figures are shown in USD on a mid-to-mid basis, inclusive of reinvested income and gross of the ongoing charges and portfolio transaction costs. The figures do not reflect the entry charge paid by individual investors. Net returns will be lower. Please see Net Performance on the previous slide for the impact of all fund charges, including the annual management charge. Benchmark source: Invesco, net return, in USD. Please refer to the prospectus for details on fees and charges.
Risk statistics ex post 1 year 3 year 5 year
Annualised standard deviation (MSCI World Small cap index) 13.90 (12.00) 11.91 (11.42) 14.85 (14.07)
Annualised tracking error 4.60 5.52 6.04
Alpha 10.02 6.41 3.65
Beta 1.10 0.93 0.97
Relative information ratio 2.14 1.01 0.53
Appendix
Invesco Core EAFE Small Cap Team Invesco Global Smaller Companies Group Invesco Small Cap Equity Team (US team) The role of ESG The case for Global Small Cap investing
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Invesco Core EAFE Small Cap teamStructure
28
Source: Invesco as at 31 December 2015. * Not involved in managing assets. Number of years subject to rounding.
EAFE Core Small Cap Equity Team
Name Responsibility Years’ experience Years with firm
Erik Esselink Portfolio Manager
Lead PM on EAFE Small Cap strategiesStock analyst on Europe, Japan 16 8
Oliver CollinAnalyst Stock analysis Continental Europe 15 1
Andrew HerronAnalyst Stock analysis Asia 3 3
Kristina Garner Stock analysis Canada, Australia and Latin America 5 3
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Invesco Global Smaller Companies Group Deep research capabilities and expert regional allocation
29
Invesco as at 31 December 2015. Number of years subject to rounding.
Specialist regional fund managersCompany research and sub-portfolio construction
Name Role Years’ experience Years with firm
Erik Esselink Europe ex UK – regional specialist 16 8
Juliet Ellis North America – regional specialist 35 12
Jonathan Brown UK – regional specialist 18 15
Ian Hargreaves Asia Pacific – regional specialist 21 21
Paul Chesson Japan – regional specialist 25 23
Andy Tidby Japan – regional specialist 19 7
Dean Newman Emerging Markets ex Asia – regional specialist 30 22
ManagementAsset allocation
Nick Mustoe Chief Investment Officer, Invesco 31 6
Strategy oversight and implementation
Martin Weiss Investment Strategist 25 10
Arwel Green Product Manager, Global Equities & Multi-Asset 15 15
Product Director
John Botham Product Director, Global Equities 23 2
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Invesco Small Cap Equity Team (US team)Structure
30
Source: Invesco as at 31 December 2015. * Not involved in managing assets. Number of years subject to rounding.
U.S. Small Cap Equity Team
Name Responsibility Years’ experience Years with firm
Juliet S. Ellis, CFASenior Portfolio Manager
Senior Manager (Lead): Small-Cap Core/Growth TeamHealth Care
35 12
Juan R. Hartsfield, CFAPortfolio Manager
Manager: Small-Cap Core/Growth TeamConsumer, Retail and Energy
15 11
Clay Manley, CFASenior Equity Analyst
Analyst: Small-Cap Core/Growth TeamTechnology
19 14
Davis Paddock, CFASenior Equity Analyst
Analyst: Small-Cap Core/Growth TeamIndustrials
21 14
Christopher Godfrey, CFAEquity Analyst
Analyst: Small-Cap Core/Growth TeamFinancials
2 2
Scott LipshutzEquity Analyst
Analyst: Small-Cap Core/Growth TeamHealth Care
1 1
Hal Clark, CFA*Client Portfolio Manager US Growth Equities 16 11
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Investment processThe role of ESG1
31
For illustrative purposes only. 1Environmental, social and governance
Idea generation
We actively screen the market for companies that have historically demonstrated consistent, high returns on capital employed Given the high hurdle of our screening, our initial investment ideas typically possess better than average ESG credentials
Fundamental research
As part of the business analysis: We consider the current and potential environmental and social impacts of the company’s operations As part of the capital allocation analysis: We consider whether the company is run for the long-term benefit of all
stakeholders, especially shareholders We seek to quantify ESG issues, demanding significant discounts if investing in companies ESG practices that are currently
sub-standard. Should we invest on this basis, we seek to effect positive change.
Portfolio construction and risk management
As active, long-term investors, we seek to encourage companies in which we invest, to adopt best in class ESG practices We actively employ our voting power to effect positive change in ESG practices. Where we disagree with major actions or strategy, we actively engage with management.
We believe that the ESG practices of company management have an impact on the long-term performance of a company’s stock.
As active, long-term investors, we seek to encourage the companies in which we invest, to adopt best in class ESG practices
How is ESG considered in our investment process?
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The smaller companies opportunity What are global smaller companies and where do they fit?
32
Source: Bloomberg as at 28 July 2015.
MSCI World index1643 membersUS$33.38 trillion market cap.
MSCI World Mid Cap index910 membersUS$6.96 trillion market cap.
MSCI ACWI Small Cap index6150 membersUS$7.86 trillion market cap.
MSCI Emerging Markets index837 membersUS$7.31 trillion market cap. MSCI
Frontier Emerging Markets index163 membersUS$0.56 trillion market cap.
Economic growth
EmergingDeveloped
Cor
pora
te g
row
th
Cap
ital
isat
ion Not just small, fledgling
technology start ups
Typically have market capitalisations of up to US$8billion
Often have business histories dating back decades
Economically attractive
Typically, a strong long-term growth profile
Better liquidity than many would think
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The smaller companies opportunity A huge investable universe
33
Source: Bloomberg as at 28 July 2015. For illustrative Purposes Only.
By capitalisation
By number of companies
75%
13%
12%
25%
13%
62%
Large cap
Mid cap
Small cap
By number, approximately three quarters of companies listed globally are ‘smaller’ companies
Investors are significantly under allocated to these companies
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Smaller companies performance 1926 - 2008Long-term, risk-adjusted outperformance
34
Source: Byeongyong Paul Choi & Sandip Mukherji, Howard University, USA. Journal of Business & Economics Research – October 2010, Volume 8, Number 10.
Over the long-term…
Smaller companies have outperformed bonds and larger companies
Smaller companies’ volatility has been in line with large companies
Long-term returns and historic performance range (%) 10-year real (1926 to 2008)
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Smaller companies performance This earnings growth typically comes from sales growth
35
Sales growth is the main driver of earnings growth for smaller companies
For larger companies, sales growth often slows or stalls A company generating sales of US$12 billion must increase sales by US$1.2 billion
to grow by 10%. A smaller company generating sales of US$1.2 billion, must increase sales by
US$120 million.
Smaller companies can be more nimble and faster to market than their larger competitors.
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The smaller companies opportunity Lack of analyst coverage
36
Source: Bloomberg as at 28 July 2015. Latest available data.
0
5
10
15
20
25
30
35
Decile 1
Decile 2
Decile3
Decile4
Decile5
Decile6
Decile7
Decile8
Decile9
Decile10
MSCI World Small Cap index MSCI World index
Research – coverage by number of analystsCompanies ranked by market capitalisation Smaller companies are less well
covered by sell side analysts
Smaller companies require more in-house research by fund managers
The result is a less efficient market
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Smaller companies performance Ownership and the alignment of interests
37
Source: Bloomberg as at 28 July 2015. Latest available data.
0
1
2
3
4
5
6
7
8
9
MSCI World Small Cap MSCI World Mid Cap MSCI World
Insider ownership% of insider shares outstanding
The alignment between shareholder interests and the management rises with insider ownership
Insider ownership is a positive internal control mechanism on decision-making
State ownership, tends to be higher amongst larger companies
Ownership and the alignment of interests is greater in smaller companies
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The role of global smaller companiesUnique diversification potential
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Source: Choi et al & Howard University, Journal of Business & Economics Research, October 2010.
5 year correlation (1926 to 2007)
Treasury bills Intermediate government
bonds
Long government
bonds
Long corporate
bonds
Large cap equities
Intermediate government bonds 0.85
Long government bonds 0.68 0.93
Long corporate bonds 0.70 0.95 0.98
Large cap equities -0.03 0.03 0.13 0.13
Small cap equities -0.37 -0.28 -0.19 -0.17 0.63
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The role of global smaller companiesDifferent return drivers apply
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Source: Eun, Cheol; Wei, Huang; Lai, Sandy. International Diversification with Large and Small Cap Stocks. Journal of Financial and Quantitative Analysis. Vol 23, No2, June 2008.
Larger companies are highly correlated because performance is normally driven by similar forces e.g. global factors
For smaller companies, a different set of return drivers apply – these are more country and stock specific
The research of Eun et al, found that stock specific factors accounted for “more than 50% of small cap fund variance but only 5% of large cap fund variance”
%
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The role of global smaller companiesA useful addition to portfolios
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Source: Bloomberg as at 30 June 2015, total return in USD. Past performance is not a guide to future returns
Smaller companies were less risky than expected
Smaller companies have historically achieved greater returns per unit of ‘risk’ taken
Smaller companies can increased a portfolio’s long-term return potential with only a moderate increase in volatility
Return per unit of risk (annualised return/volatility)
Annualisedreturn/volatility
3 years
5 years
7 years
10 years
15 years
MSCI World Small Cap 1.51 0.98 0.41 0.43 0.48
MSCI World 1.41 0.96 0.29 0.37 0.23
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Global smaller companiesSummary
A huge, under researched opportunity set
A history of long-term outperformance
Unique diversification potential
A useful addition to an investor’s equity allocation
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Past performance is not a guide to future returns
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This marketing document is exclusively for use by Professional Clients and Financial Advisers in Continental Europe and Qualified Investors in Switzerland. Data as at 31.12.2015, unless otherwise stated. This document is not for consumer use, please do not redistribute. It is not subject to German regulatory requirements that ensure impartiality of financial analysis. Therefore, the prohibition of trading before the release of financial analysis does not apply.
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