Schroder Small Cap Discovery - looking for undiscovered potential

Kate Marshall | Mon 25 March 2019

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• Smaller companies in Asian and emerging markets haven't done as well as larger ones in recent years
• We think they've got great long-term potential though
• Matthew Dobbs has lots of experience in this part of the market – we trust him to do well over the long run

Our view

We think Schroder Small Cap Discovery offers a unique way to invest in some of the world's fastest-growing economies.

Most funds that invest in Asian and emerging markets focus on large, well-established businesses. But this one mainly invests in innovative smaller companies. They're at an earlier stage of their development, so they've got plenty of growth potential. It means there's also a greater chance of failure though – a focus on both smaller businesses and emerging markets increases risk, so a long-term outlook is essential.

Matthew Dobbs runs the fund and he's got plenty of experience investing in these markets. It's not all down to him though. There are thousands of companies in this part of the market. So Dobbs has the help of co-manager Richard Sennitt and a robust team of analysts based across Asia. They help him sift through the market and uncover the most promising opportunities.

We think this fund has lots of potential. It could be an interesting way to diversify an adventurous long-term growth portfolio. And it currently has a place on the Wealth 50 list of our favourite funds.

The small cap advantage?

Smaller companies offer lots of untapped growth potential. They often do something niche compared with larger rivals, and this gives them a competitive edge. It means we expect them to perform better over the long run.

This won't be the case every year though. Over the past few years the broader Asian and emerging stock markets, which are mainly made up of larger businesses, have outperformed. Matthew Dobbs says they were partly boosted by some of the region's biggest ecommerce and technology companies, such as Tencent and Alibaba. The fund doesn't invest in companies that big, so it's missed out on some of the gains.

Lower exposure to better-performing Latin American markets, including Brazil, also hasn't helped recently. Dobbs doesn't think there are enough quality companies in these markets though. Instead he's invested more in Asian markets, like Taiwan, India and Hong Kong. Here he's found more companies that are in good financial shape, have solid business models and are run by successful entrepreneurs. He thinks they'll do better over the long run.

The fund's long-term performance has been excellent. Since launch in 2012, it's grown 63.5%* compared with 41.3% for the broader emerging stock market. It's also been less volatile. This isn't a guide to future performance though and all investments fall as well as rise, so you could get back less than you invest.

Past performance is not a guide to the future. Source: *Lipper IM to 28/2/2019

Rising consumption could lead growth

Matthew Dobbs thinks one of the biggest trends in Asian and emerging markets over the coming years is the rise in consumption. Rising wages and a rapidly growing middle class means people will gradually spend more on things like consumer goods, healthcare and financial services.

Dobbs has focused on companies he thinks could benefit. Around 30% of the fund is invested in consumer-related companies, for example. Current holdings include Indian cinema operator PVR, Taiwan curtain seller Nien Made Enterprise, and Gourmet Master, which sells coffee and bakery goods mainly across China and Taiwan.

He's also added to a variety of investments in the financials sector over the past year. This includes stock exchange operators, like Bursa Malaysia and Bolsa Mexicana, City Union Bank in India, and BR Properties in Brazil.

Find out more about this fund including charges

Schroder Small Cap Discovery Key Investor Information