11 December 2025 (pre-recorded 1 December 2025)
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[INTRODUCTION]
Staci West (SW): Welcome back to the Investing on the go podcast brought to you by FundCalibre. This week we explore why small-caps may be poised for a recovery and where opportunities are emerging across global markets today.
Chris Salih (CS): I’m Chris Salih, and today we’re joined by Nish Patel, manager of the Global Smaller Companies Investment Trust. Nish, once again, thank you for joining us.
Nish Patel (NP): Thanks a lot for having me, Chris.
[INTERVIEW]
CS: No problem at all. Let’s start, I mean, the listeners kind of know how the small-cap sort of spectrum works, you know, longer-term they tend to outperform their larger peers, but they can be more fragile, more exposed to those market downturns. They’re often sort of in the eye of the storm.
I think one of the things that’s interesting about your portfolio is how you sort of go about delivering sort of faster owners growth, but with that margin of risk, how do you go about managing those sort of balance between growth and managing risk within the Trust?
NP: Yeah. So as you quite rightly said, one of the beauties of investing in smaller businesses is that it is an inherently faster growing asset class because the companies that we invest in, they tend to start off from a lower base. So whatever they do, it is more meaningful to them than it is for a larger business. For example, if they open a new plant or make an acquisition, that is gonna move the needle a lot more for a small company than it is for a larger company. So that’s why you tend to have faster earnings growth.
Smaller companies, the problem is they are inherently more fragile entities. More things tend to go wrong for smaller companies than for larger companies because these companies aren’t as well developed. They don’t have a wider or a deeper a pool of managers to call on. They have less access to financial capital and they tend to be more reliant on, for example one particular customer or a supplier or one product. So that makes life a lot more challenging for smaller companies in terms of resilience. So what we wanted to do really from the outset was to offer our clients that faster earnings growth potential that is inherent in this asset class, but we lower levels of risk.
And the way that we lower risk for our clients is we try and focus on the smaller companies that are higher quality, that are able to deal with all those traditional problems that smaller companies face. So for example, some of the quality ca characteristics that we look for are companies with really strong competitive advantages so that there might be, for example, a differentiated product or service or they may be a low cost producer.
They operate in industries that have barriers to entry. The companies that we invest in generally tend to have good balance sheets. They tend to generate lots of cash, and they’re not so reliant on one customer, one product or one supplier. So they’re able to withstand some of these challenges that smaller companies typically face. And the management teams we partner with, they have long track records. A lot of them come from bigger companies and want a more of an entrepreneurial challenge. So they turn up to smaller companies to try and run these businesses. Or they’re led by founders who have a lot of skin in the game. So that helps us from a quality perspective.
Now, we do get things wrong. Many people get things wrong, so if you do get things wrong, you want to have protection on the downside. So we look to buy into these higher quality companies when they are trading on a significant discount of what they’re intrinsically worth. So if we are wrong in our analysis, then that margin of safety or that difference between the share price and what the intrinsic value is will protect us on the downside. So that’s how we approach it.
CS: Okay. And just in terms, we’ll go back into the portfolio, in a bit more detail in a moment, but maybe first, could we just sort of have a look at the wider market? I mean, it has been sort of momentum led and driven by large-caps. Could you maybe — I’m assuming you feel that your sort of segment of the market is primed for quite a bit of a recovery— maybe just to highlight some of the characteristics that make you so confident in sort of small-caps producing strong returns from investors from here.
NP: Yeah. If you look back, you know, really over the last a hundred years or so, if we look at data going back a hundred years, it’s very clear that smaller companies outperform over the long term. The issue is it goes in cycles. Most things are cyclical, believe it or not. And small-cap versus large-cap performance is certainly cyclical. And historically, these cycles have been about 12 years in length on average. Sometimes longer, sometimes shorter. But we have been in a protracted relative bear market for smaller companies that started really in 2011/2012 time period. Since then, larger companies have dominated. If you look at the relative valuations of smaller companies versus larger companies, they are at very attractive levels. They’re at the sort of levels that have historically kickstarted a new cycle for smaller companies. So that does get us excited.
There are some things that can help with starting a recovery. Certainly interest rate cuts are more helpful to smaller companies than they are for larger companies. And we know that we’re in the middle of an interest rate cutting cycle, certainly in the US and in the UK as well. So that’s helpful.
The other thing that could potentially be of help is a pickup in economic growth. Economic growth has been very bifurcated in the sense that the higher end consumer has certainly done very well and has led economic growth in many parts of the world. But lower end consumers has struggled. Growth has been driven by certain sectors of the economy, especially technology. It’s not been broad based, but as that broader based growth picks up, that is likely to help smaller companies, they do tend to thrive in periods of higher economic growth.
And then finally, we do think that we are in a period of structurally higher inflation. Now, we’ve been in a period of benign inflation for a very long time. Many of the factors that drove that period of low inflation are starting to reverse. So factors such as deglobalization a new commodity cycle, these things are likely to lead to higher for higher for longer inflation. And what’s interesting about that is that smaller companies tend to do better in the inflationary times than larger companies. So again, that is something that we are excited about.
CS: Just two quick questions to off shoot on that. Firstly, interest rates are you perhaps surprised that, or how small-caps performed as you’d expected them to with these rate cuts that started to happen? Or do we need to see a bit more for them really to hit their own stride?
NP: I think that there’s been several crosscurrents that kind of muddied the water, if you like. So the larger companies which have more exposure to technology have done really well because that sector has been on fire, hasn’t it? It’s been helped by factors such as AI which has seen tremendous investment. So that has helped the larger cap sector. And smaller companies don’t really have so much exposure to technology. It’s more in the areas such as energy, financials, industrials, consumer so those sectors haven’t really had so much interest. I think as we start to see more interest rates come, cuts come through, you should start to see a broadening in the equity markets and smaller companies will certainly benefit from that.
CS: Well, that was gonna be the next question. You kind of alluded to it there, you know, versus the index, you have an underweight tech. You are more positioned for a, would it be fair to say you are more positioned for a broader base recovery in terms of your exposures at the moment? And obviously it’s more stock specific, but when you look at the portfolio, there must be an element of a focus on that broader recovery.
NP: Yeah, so we are very opportunistic in where we buy investments. And over the last couple of years, we’ve found a lot of exciting opportunities in the industrial space. So the industrial space is a broad sector. It includes defence companies, infrastructure businesses, services companies, and it was really very out of favour because there was an ongoing destocking cycle post the COVID recovery. And many of these businesses were hit by supply chain problems. But we think the longer term outlook is really favorable because of factors such as nearshoring energy efficiency automation spending on defence is going is is rising. All these things are helpful for that sector and the valuation to look very reasonable. So we’ve got a large weighting in the industrial sector. We’ve got about 30% or so in the industrial sector. It’s an area that we like at the moment.
CS: Okay. And just in terms of how you break the portfolio down now, I believe you put it into sort of a number of categories. Could you maybe just explain them and give us an example of each please.
NP: Yeah, of course. So we buy compounders, what we think are businesses that generate very high returns. And that can grow reliably, whatever happens in the economy and in financial markets. And we tend to buy these businesses and hold them for a really long time so that they can benefit from compounding. So we’ve held businesses in the portfolios for over 10 years. And these have been the longer term compounders. So for example, we own a company called Shark Ninja, which is a US business. It’s a founder led business. So the founder still owns just over 40% of the company, and they are a producer of high quality, lower-cost home appliances. So you’ve probably seen many of their adverts on tv for, for air fryers for mixers for vacuum cleaners, et cetera. And their competitive advantages, first of all, their brand. And secondly, their low cost producer position. So many of their production facilities are in the emerging markets. And they have a track record of developing new products very quickly. And by having a low cost producer position, they are able to price lower than their competition such as Dyson and take market share from these incumbents. They’ve got a really long track long runway of growth ahead of them.
So they have just under 40 products in their lineup at the moment. They have a full lineup in the US but they only offer about half of their products currently in the UK market. And they’re very under-penetrated in areas such as Germany. So there’s a long runway for current product lineup to be sold in existing geographies and for them to continue to introduce new products. So that’s a business that we like that has got a sustainable competitive advantage and that can continue to grow for many years ahead of it. So that’s a compounder.
In the quality cyclicals area, in the mortgage market, we like this company called Mortgage Advice Bureau in the UK. So this is a cyclical business that is driven by mortgage volumes. So that can be either refinance volumes or new purchase volumes.
Now, if we think back to what happened five years ago, so five years ago, many people were moving house because we were in the middle of the pandemic. And many people wanted a largest place to live in. So mortgage volumes really did spike in in in 2020/2021. Now, many of those deals, because those interest, interest rates were low at that time, many of those deals were on five year fixes. So those five year fixes are now coming due and are likely to be refinanced. And Mortgage Advice Bureau should see a pickup in volumes in revenues, in margins. As a result of that. This is a a very well positioned business. It is one of the UK’s largest mortgage broker networks. It does benefit from scale in terms of being able to offer a wide range of products from, from different providers in different financial institutions. And they have invested heavily in technology. So that’s a company that we like in the quality cyclicals area.
And then finally our third bucket is long cycle. So there are several industries that we categorise as long cycle in nature. So these industries tend to see a period of spending on, on on new capacity followed by realisation that there’s been a too much spending, and then there’s a long drought of underinvestment. And in that period you see consolidation and fixing of balance sheets of incumbent companies. So we think the commodity industry has been through a long period of underinvestment.
So the classic example is the oil industry. So the oil industry really peaked in 2013/2014. We did see a lot of bankruptcies, particularly in the shale space in North America. That industry has now consolidated the balance sheets have been fixed. The demand really hasn’t changed much. In fact, the demand has grown for oil. And the supply situation is very tight. Many oil company executives are not drilling for new assets. They are actually returning capital to shareholders. So there’s a new found capital discipline. So we are in that ideal period of the capital cycle now to invest in areas such as oil and commodities. And we have started a position in a company called Vitas Energy in the US which operates in the Williston Basin. It is a lower risk model. So they actually have a non-operated model. They don’t actually do any drilling themselves. They provide financing to their partners who undertake drilling programs and they collect royalty payments as those partners drill for assets. So that’s the way we think about the world.
CS: Okay. And I mean, you’ve sort of described those three buckets really well there, and you’ve sort of highlight that focus on quality and the idea of trying to build that risk element in, does that make your companies quite eligible when it comes to M&A in markets? And have you found that when they are courted that it’s always welcome?
NP: So we do see M&A activity in our portfolio. We had seven takeover bids in the last financial year. Many of those were in the UK portfolio since the end of the financial year. So this is really from the start of May. We have had another five bids in the portfolio. And we’ve had interest in other, in other companies, but no formal bid yet. So we think that means that people do like our assets they are seen as good quality assets and they are undervalued as well. So we are sticking to what we do in terms of our philosophy and process, and it is showing up in terms of attraction for our assets. And even in the financial metrics, when you look at our companies on a median basis versus the benchmark, they do tend to have those higher quality characteristics and that undervaluation as well.
CS: Ok, just turning to sort of the portfolio itself, I mean, I think I looked quite recently and you had some sort of underweights within the UK and the US. There’s maybe different reasons for that. And by contrast, Japan is the largest overweight in the portfolio. Now, there’s a lot going on in Japan from a corporate perspective with what’s going on with the Tokyo Stock Exchange and the idea of focusing on smaller companies to make sort of improvements to corporate reform sort of increase shareholder value. It is that one of the reasons the attractions have come to Japan and maybe just explain the sort of balance of the portfolio as we speak.
NP:So you’re quite right. We do like Japan because we think there’s a sea change in terms of corporate reform. Not only that Japan has returned to inflation after several years of disinflation or even deflation. The outlook has changed for many companies in Japan because they are now able to raise prices and they’re now seeing nominal revenue growth which is helpful for them. So these factors along with a government that is now spending money on fiscal programs mean that the outlook for Japanese businesses has improved.
Now in the corporate reform is helpful from the perspective of many of the beneficiaries of corporate reform are smaller businesses. So many of the businesses that are trading below book value that have an ROE below 6% that are facing potential delisting are those smaller companies. So the opportunity set of candidates that could benefit from corporate reform is bigger in small-caps than it is for large-caps. So we think that that is a fruitful area. Our team have found some really good opportunities there, and they’ve delivered some really good returns in their portfolio from identifying these corporate reform opportunities.
CS: I was just gonna ask about the UK and the US in terms of those valuation. Is it valuation for the US?
NP: For the US it is valuation. We are finding less opportunities from a bottom up perspective. And certainly over the last three month, three to four months or so, we have seen more speculative activity in the US market. In the small-cap market, we are seeing those profitless businesses do well. Those so-called meme stocks have come back. So the environment is a little bit more speculative. We are finding less opportunities, we’re finding more opportunities in places like Japan, in places like Europe and even the emerging markets.
Now, the UK we do have a hybrid benchmark. So we actually have our benchmark as 20%, the Numis Small Cap index, which is the UK small-cap index, 80% the MSCI World ex UK small cap index. So despite having 18.7% in the UK at the moment. So that is still a sizeable weighting. We’re underweight though relative to our hybrid benchmark, but we are much higher than most global funds. We have about 4% or 5% in the UK. So we are underweight, but we still have 18.7% there. And we are seeing a lot of opportunities in the UK market.
CS: Okay. And, and just finally, obviously the fund is on sort of the AIC, association of investment companies, sort of Dividend Hero list. You know, I understand it’s a byproduct of the process, but nevertheless, 55 years of sort of increasing dividends is nothing to sort of be sniffed at. We talked about Japan earlier, but there’s other emerging markets that are also looking at increasing dividends across the piece. Do you see that as a greater area of focus from here on in terms of dividends searching for dividends, well have companies that are eligible in terms of offering that dividend as well because obviously that sort of gives investors a cushion if we see sort of share appreciation volatility in market. Do you feel there’ll be more diversity as essentially what I’m saying going forward?
NP: Yeah, so the dividend is not our primary focus. Our primary focus is actually capital growth, but we focus on businesses that generate lots of cash and they need to do something with the cash. And a lot of them are either buying back stocks or paying a dividend. So the dividend is a byproduct of that philosophy of cash generative businesses. And these businesses are growing inherently, so you’d expect the dividend to continue to grow. And that’s what’s contributed to this 55 year record that we have. So these Japanese businesses and some of the businesses in Korea in particular are undertaking improvements to capital allocation. Some of them are introducing dividends and buybacks. So we should see some benefit from that. But we are not specifically identifying, trying to identify dividend payers in this fund. That’s not what we do.
CS: Okay. Nish, thank you very much for spending some time with us again today.
NP: Thank you very much, Chris. Appreciate your time.
SW: Smaller companies have traditionally outperformed their larger counterparts over the longer term and the Global Smaller Companies Trust offers investors the opportunity to participate in this potential growth. To learn more about the Global Smaller Companies Trust, please visit fundcalibre.com, and don’t forget to the subscribe to the Investing on the go podcast.
