Schroder Small Cap Discovery: uncovering the world’s hidden gems

Kate Marshall | Tue 14 March 2017

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• Fund combines exposure to smaller companies with the growth potential of Asian economies
• Manager continues to focus on sectors that could benefit from rising consumer spending
• He favours businesses with unique qualities their competitors find hard to replicate

Our view

The Schroder Small Cap Discovery Fund aims to capitalise on the increasing number of smaller company opportunities exposed to higher-growth regions of the world.

Combining exposure to some of the world’s most innovative smaller companies with the long-term growth potential of Asian and emerging markets makes the fund an exciting proposition, in our view. Smaller companies in these regions tend to be significantly under-researched by other investors. We feel this provides a good opportunity for those willing to scour the market and unearth hidden value. Investing in smaller companies and emerging markets does make this fund a higher-risk proposition, however.

Matthew Dobbs, the fund’s manager, is a highly-experienced investor in Asian and emerging markets. He remains passionate about uncovering companies at an early stage of their growth path, which have been overlooked by other investors. The manager has demonstrated an ability to add long-term value in this area of the market and the fund features on the Wealth 150+ of our favourite funds at the lowest ongoing charge. The Vantage platform fee of up to 0.45% p.a. also applies.

Performance

Over the past year the fund delivered an attractive return of 29.4%*, although this is not a guide to its future performance. However, the fund faced a number of headwinds and underperformed the broader emerging markets. Small and medium-sized companies, for example, underperformed their larger counterparts over the year, while the fund’s lack of exposure to some of the better-performing and more economically-sensitive areas of the market, such as financials and other commodity-related industries, weighed on returns.

Past performance is not a guide to the future. Source: Lipper IM* to 28/02/2017

Full year past performance data prior to February 2013 is unavailable.

The fund also has limited exposure to countries with significant commodity reserves, such as Russia and Brazil, which performed particularly strongly last year. Matthew Dobbs currently favours companies listed in countries such as Taiwan and India and developed Asian economies such as Hong Kong.

The fund has delivered impressive long-term performance and has grown 62.3% since launch in March 2012, although please remember past performance is not a guide to future returns. Our analysis suggests good stock selection and a bias towards smaller businesses has added value.

Portfolio review

Matthew Dobbs continues to focus on domestically-oriented consumer companies that he feels will benefit from the ongoing transition in Asian and emerging markets from export and investment-led growth towards domestic consumption. Around 42% of the fund is currently invested in consumer-related companies.

Elsewhere, new investments include Pilipinas Shell, part of Royal Dutch Shell and based in the Philippines. The manager believes the company could benefit from increased infrastructure spending as more petrol stations are built. He also views it as a way to access rising consumerism in the country, as existing outlets are upgraded and customers are encouraged to spend more on products and services.

An investment in Indian financial services business Max Financial was sold after a strong period of performance. Shares in KEPCO were also sold as the South Korean power provider is failing to gain traction in the orders it receives, according to the manager.

Outlook

Matthew Dobbs is mindful of the risks that could cause short-term stock market volatility. China continues to contend with slowing economic growth, while rising interest rates and a strengthening US dollar also presents challenges for Asian and emerging countries that have high levels of US dollar-denominated debt. More recently, the election of Donald Trump as US President has led to fears his protectionist policies could harm emerging markets exports.

The manager is positive in his long-term outlook for the region and continues to focus on companies he believes will thrive regardless of wider economic conditions. These businesses often have unique qualities that their competitors find hard to replicate and an ability to make use of new technologies and adapt to changing market conditions.

Find out more about this fund including how to invest

Please read the key features/key investor information document in addition to the information above.