- Equity Portfolio Manager
United Kingdom, Intermediary
Change
For professional investors only. Capital at risk. This is a marketing communication. Please refer to the prospectus of the Funds and to the KIID and/or offering documents before making any final investment decisions. Past performance does not predict Future returns.
The views expressed are those of the author(s)/speaker(s) at the date of publication and are subject to change. Other teams may hold different views and make different investment decisions.
Anna is a small-cap portfolio manager at Wellington and manages our flagship global small-cap fund, the Wellington Global Perspectives Fund. Anna’s career spans more than two decades and she has been researching and investing in small-cap equities since 2000. Amid renewed investor interest in the asset class, we ask Anna some of the questions we most frequently hear from clients.
1. Over your two decades investing in the small-cap market, what lessons have you learned and what principles do you stick to?
I think a lot of investors experience an “aha” moment in their careers, when everything starts to make sense, and their investment beliefs begin to solidify. For me, that moment came during the global financial crisis (GFC) in 2008. This profoundly influenced my approach to portfolio construction and risk management in small caps.
Back then, investors lacked the sophisticated tools we have today, and consequently my portfolio suffered more downside than I anticipated. The GFC underscored the importance of balancing risks across a diversified portfolio and crucially, getting on top of any unintended risks. Today, this translates to my belief in the importance of a centralised risk framework that balances risks across geographies and sectors, and the use of sophisticated tools to look at factor concentrations. I believe this framework — paired with thoughtful security selection — helps mitigate drawdowns in the asset class and produce better risk-adjusted returns.
The experience also strengthened my conviction that a greater emphasis on higher-quality business models and solid balance sheets is key when investing in small caps. It really pays to focus on management teams that excel in capital allocation and that can clearly articulate their strategic vision.
2. You mentioned risk management. Small caps are typically more volatile than large caps. Could you tell us more about how you and your team manage risk?
Small caps can be a highly inefficient and volatile asset class, but my team and I also believe it is an asset class in which security selection can be particularly additive. A robust risk and portfolio construction framework is crucial not only to manage risk but also to maximise the impact of security selection. As a result, we consider selecting great companies through bottom-up fundamental research to be our first line of defence when it comes to risk management. Our second line of defence on risk management is a thoughtful and consistent approach to portfolio construction.
Within global small caps, we think maintaining a core style — rather than having a persistent bias to value or growth — is an effective way to get the best out of security selection. In practical terms, this means that whenever we make a change to the portfolio, we strive to minimise factor risk, whether style, country or industry, to ensure that performance is driven mainly by our stock selection. This results in a core portfolio that is well-balanced across the style spectrum, is highly diversified and maintains a modest tracking risk profile.
We believe this gives us the best chance of delivering attractive, risk-adjusted returns for clients in a at times volatile asset class.
3. Why should clients allocate to global small caps rather than regional allocations?
This comes back to our belief in the importance of a core risk-management framework. Imagine two regionally focused small-cap portfolios that don’t “talk to each other”, such as a UK small-cap fund and a US small-cap fund. If you then combine them, you run the risk of taking outsized, unintended bets either at the region, industry or style factor level. By contrast, a single global small-cap portfolio may have the advantage of a bird’s eye view when it comes to deploying one risk budget across the regions and sectors the manager believes are most likely to outperform.
It's also important to consider current market dynamics. Investors seem currently to favour a global allocation to small caps given the greater diversification it can offer in a more concentrated market environment.
4. How has the small cap market changed over time?
In 2020 and 2021, a dramatic spike took place in the number of IPOs and special purpose acquisition companies (SPACs). However, this was an atypical period of time, and small caps don’t normally have such easy access to capital markets.
Tougher funding markets aren’t necessarily a negative for investors. They can actually provide a real opportunity to add value in small caps, especially if you focus on high-quality companies with strong balance sheets. Regardless of whether capital markets are open or not, such companies tend to be capable of self-funding and can therefore continue to operate and grow.
Interestingly, there has been a notable decline in the quality of small-cap companies broadly, with the percentage of US small caps with negative earnings roughly doubling over the past decade. Again, this isn’t necessarily a negative for investors. I believe this does, however, point to the need for active management within the asset class and means fundamental stock picking decisions are crucial in selecting the companies most likely to outperform.
5. What’s keeping you up at night?
Macroeconomic and geopolitical events can have an impact on any investment — and global small caps are no exception. While my team and I have a high degree of confidence in our approach to risk management, we anticipate market volatility is likely to remain elevated, especially given the US election, ongoing war in Ukraine and conflict in the Middle East.
To combat this, we stress test the portfolio, looking at potential impacts from exogenous shocks to ensure performance is in line with our expectations.
6. Could you highlight a couple of examples of companies that you think are exciting right now?
The small-cap universe is rich in unique and diverse companies. Some examples I am particularly excited about include a US-based movie theatre operator whose strong balance sheet should mean it is well-positioned to gain market share within the industry; a UK-based poultry producer we believe to have a long-term competitive advantage; and an Indian commercial vehicle manufacturer with an emerging defence business.
7. What’s your outlook for global small caps from here?
As many investors will no doubt be aware, small caps have beaten large caps over time. However, in the current cycle, small caps have underperformed large caps for over a decade. History suggests this large cap leadership may be likely to revert, which could pave the way for small caps to outperform. As a result, from a beta perspective, my team and I are very positive about the prospects for the asset class over the long term.
We also see compelling potential opportunities from an alpha perspective. Small-cap valuations appear attractive across regions, with some trading more appealing relative to large caps than they have for decades. We also believe that small-cap fundamentals are poised to improve and the gap in sales and earnings growth between large- and small-cap stocks is likely to narrow, given moderating interest rates and modest economic growth.
While of course we continue to monitor macroeconomic and geopolitical risk, all of this drives our positive long-term view of the asset class. If, as we believe, small caps are poised for a market reversal, this creates a strong driver of returns for the asset class. Furthermore, the complexity, inefficiency, and potential volatility within small caps can offer significant opportunities for outperformance through skilled stock selection.
Important Risk Information
CAPITAL: Investment markets are subject to economic, regulatory, market sentiment and political risks. All investors should consider the risks that may impact their capital, before investing. The value of your investment may become worth more or less than at the time of the original investment. The Fund may experience a high volatility from time to time.
CURRENCY: The value of the Fund may be affected by changes in currency exchange rates. Unhedged currency risk may subject the Fund to significant volatility.
EMERGING MARKETS: Emerging markets may be subject to custodial and political risks, and volatility. Investment in foreign currency entails exchange risks.
EQUITIES: Investments may be volatile and may fluctuate according to market conditions, the performance of individual companies and that of the broader equity market.
HEDGING: Any hedging strategy using derivatives may not achieve a perfect hedge.
MANAGER: Investment performance depends on the investment management team and their investment strategies. If the strategies do not perform as expected, if opportunities to implement them do not arise, or if the team does not implement its investment strategies successfully; then a fund may underperform or experience losses.
SMALL AND MID-CAP COMPANY: Small and mid-cap companies' valuations may be more volatile than those of large cap companies. They may also be less liquid.
SUSTAINABILITY: A Sustainability Risk can be defined as an environmental, social or governance event or condition that, if it occurs, could cause an actual or potential material negative impact on the value of an investment.
PLEASE REFER TO THE FUND PROSPECTUS AND KIID FOR A FULL LIST OF RISK FACTORS AND PRE-INVESTMENT DISCLOSURES.
For Professional investor use only, not suitable for use with a retail audience.
This material and its contents may not be reproduced or distributed, in whole or in part, without the express written consent of Wellington Management. This document is intended for marketing purposes only. It is not an offer to anyone, or a solicitation by anyone, to subscribe for units or shares of any Wellington Management Fund (“Fund”). Nothing in this document should be interpreted as advice, nor is it a recommendation to buy or sell securities. Investment in the Fund may not be suitable for all investors. Any views expressed in this document are those of the author at the time of writing and are subject to change without notice. Fund shares/ units are made available only in jurisdictions where such offer or solicitation is lawful. The Fund only accepts professional clients or investment through financial intermediaries. Please refer to the Fund offering documents for further risk factors, pre-investment disclosures, the latest annual report (and semi-annual report), and for UCITS Funds, the latest Key Investor Information Document (KIID) before investing. For each country where UCITS Funds are registered for sale, the prospectus and summary of investor rights in English, and the KIID in English and an official language, are available at www.wellington.com/KIIDs.
In the UK, issued Wellington Management International Limited (WMIL), a firm authorised and regulated by the Financial Conduct Authority (Reference number: 208573).
©2024 Wellington Management. All rights reserved. As of 12 April 2024. WELLINGTON MANAGEMENT FUNDS ® is a registered service mark of Wellington Group Holdings LLP.
Stay up to date with the latest market insights and our point of view.
Equity Market Outlook
Continue readingMultiple authors