Security vs. growth: Three large and small-cap funds for your ISA

How much you invest in small and large-cap equities is one of key questions investors should be asking when they try to build a diversified portfolio – and the answer often comes down to whether you want more security or more growth.

Market capitalisation, or market cap as it is usually called, is the total value of all the shares of a company. A ‘small cap’ is just a small company. For example, Somero Enterprises, a company which installs concrete floors, has a total of about 56.29 million shares. On 5 March 2019 one share was worth 332.5p. 56.29million times 332.5p gives you a market value of just over £187 million.

Likewise, a ‘large cap’ is a large company. The largest company on the UK stock market today is Royal Dutch Shell – which has a market value of £192 billion.

Pros and Cons of size

The flexibility of small-caps typically gives them the chance to produce greater growth, especially as they are not researched by analysts to the same degree as their larger counterparts. By contrast, large-cap stocks tend to be companies that are established in their market with long-term histories. They often offer greater stability, as well as typically paying a dividend – though some smaller companies also pay dividends as well.

Recent history highlights the growth potential of small-caps. In the past decade the FTSE Small Cap Index has returned 331.48%*, compared to 185.19%* for the FTSE 100.

However, volatility and liquidity concerns – how easy, fast and cheap it is to buy and sell a company’s stocks – reflect the challenges of investing in small-cap funds. For example, during the credit crunch as much as 50 small businesses were closing every day. Add to this the importance of the consistent income likely to be offered by large caps, at a time when interest rates are so low – and suddenly they look very attractive.

Below we look at three large and small-cap fund options for your ISA:

Large caps

Rathbone Income

This fund has one of the best track records in the sector for raising dividends annually over a period of almost 25 years. Carl Stick, who has managed the fund since 2000, typically builds a concentrated portfolio of 30-50 stocks, all of which demonstrate high quality and visibility of earnings.

The investment process uses ten core stock selection principles and revolves around three areas: risk management, quality and value. The fund has a historic yield of 4.28%* and currently has over two thirds (67.8%) of its holdings in FTSE 100 companies. Largest holdings include pharmaceutical company GlaxoSmithKline (4.3%*) and oil & gas giant BP (4.2%*).

Fidelity Global Special Situations

As the name suggests, this fund leverages off the large investment team at Fidelity to find what the manager sees as the best ideas around. Jeremy Podger uses a strict set of rules to help identify companies, with the fund designed to deliver returns even in a low growth environment.

Jeremy looks specifically for companies with the potential for significant share price appreciation – this can be identified by the current valuation being too low, or because it fails to recognise the future growth prospects of a company, or both. Jeremy currently sees lots of opportunities in the United States with over half (55.8%*) of his portfolio allocated to the region.

BlackRock European Dynamic

Europe is arguably the most maligned market globally amid talk of recession, but regardless of whether it is in – or simply flirting with – economic contraction, there is likely to be opportunities for bargains.

Fund manager Alister Hibbert typically builds a fairly concentrated portfolio of 35-65 stocks with a focus on companies with medium to long-term earnings power that is greater than the market, while also looking for undervalued firms. Alister currently has more than 82%* of the fund investing in large-cap equities, with France (29.5%*) the largest individual country he is invested in.

Smaller Companies:

Chelverton UK Equity Growth

James Baker constructs his portfolio around small and mid-cap companies which can bank-roll their own growth. The investment process, which also includes a focus on shareholder friendly management, typically filters the universe down to around 250 stocks for further in-depth research.

The fund was only launched in October 2014 but has already returned 108.2%** to 5 March, 2019. Technology (24.9%*) and industrials (17.1%*) are the two largest sector holdings in the portfolio.

Unicorn UK Smaller Companies

This is a high conviction portfolio of around 40 stocks. All companies must be profitable at the point of investment. Regular company meetings are key, and it is very rare that an investment is made in a stock without a face-to-face meeting.

Individual holdings are typically limited to a 5% position in the portfolio, which reduces the risk of one large holding hurting the fund’s performance. 4imprint group (4.5%*) and Goodwin (4.4%*) are the two largest holdings at present in the portfolio.

Standard Life Investments Global Smaller Companies

This fund targets smaller companies from all across the world – including emerging markets. Fund manager Alan Rowsell employs SLI’s proprietary screening tool, Matrix, at the start of his process. It looks for four key factors; quality, growth, momentum and value.

The end process gives a ‘best ideas’ list of circa 100 names, from which a portfolio of 50-60 holdings will be built. The fund has a bias towards growth sectors and tends to avoid cyclical industries like energy and materials. It currently has a strong bias to developed markets with US equities (43.3%*), UK equities (13.4%*) and Japanese equities (6.9%*) its three largest country exposures.

*Source: Fund fact sheet, 31 January 2019
**Source: FE Analytics, total returns in sterling, 20 October 2019 to 5 March 2019

The views of the author and any people interviewed are their own and do not constitute financial advice. However the knowledge that professional analysts have analysed a fund or trust in depth before assigning them a rating can be a valuable additional filter for anyone looking to make their own decisions. Before you make any investment decision make sure you’re comfortable and fully understand the risks. If you invest in fund or trust make sure you know what specific risks they’re exposed to. Past performance is not a reliable guide to future returns. Remember all investments can fall in value as well as rise, so you could make a loss.