FGP Global Smaller Companies Fund
We launched the FGP Global Smaller Companies Fund in 2021 to provide investors with opportunities for long-term capital appreciation in global small cap equities and diversification benefits.
Why smaller companies?
Smaller companies have historically generated higher absolute and risk-adjusted equity returns than larger companies1 (albeit with more volatility), and we believe this category provides abundant opportunities that are distinct from larger capitalization stocks.
The Fund’s investment universe encompasses a significant segment of the broader market that might be underrepresented in investors’ portfolios. The total market capitalization of the Fund’s benchmark, the MSCI ACWI Small Cap Index, is approximately one-fifth that of the S&P 500 Index. The small cap universe is also a fragmented market. The 10 largest companies in the MSCI ACWI Small Cap Index had a combined weight of only 1.5% (as at June 30, 2023). This is a major difference from large-cap indices, where a few stocks can drive a large portion of the return.
The Fund in brief
We aim to own a collection of global companies with strong business models that produce outstanding results in terms of shareholder returns, business performance, and economic resiliency.
Small-cap companies typically grow earnings faster than large caps. However, this comes with more volatility in both stock prices and business results. The FGP Global Smaller Companies Fund seeks to provide full participation in small cap upside with less downside risk.
We do this by focusing on owning companies with the following characteristics:
- Resilience and predictability – A high mix of earnings generated from recurring sources such as replacement demand, subscription model, and a loyal customer base. There are clear and understandable demand drivers for our companies’ products and services.
- Competitive advantages – Our companies have differentiating factors that protect them from intense competition. They have businesses that are proven to be difficult to replicate.
- Financial strength – Low or minimal use of debt.
- Healthy growth prospects – Ability to grow earnings faster than the index over the long-term. We prefer companies that grow organically and do so by providing an exceptional value proposition to their customers. They can grow with relatively little incremental capital employed.
- Strong cash flow generation – The steady generation of cash allows our companies to better weather economic downturns and have more options in terms of capital allocation. We only consider companies with a long history of profitability and positive free cash flow.
- Prudent capital allocation – Our companies deploy their capital in sensible ways. They are aware of price versus value and return on capital.
We purchase new holdings at prices below our estimate of intrinsic value, which is based on our long-term discounted free cash flow analysis. We aim to buy at prices that protect our clients’ capital in a reasonable downside scenario.
The Fund invests in companies with a market capitalization typically in the USD 1 billion to USD 10 billion range. The Fund typically holds 40 companies and a cash weight of 2% to 5%. There may be exceptional periods where the Fund will hold as few as 35 companies and as many as 60. Due to the lower liquidity of the universe, we will have a maximum weight of 4% in a single company at cost. The maximum absolute weight of any one company is 10% at market.
Investing in smaller companies means facing higher potential risk. That is why risk mitigation is a key component of our investment strategy. We think about risk in the following ways.
|Risk Type||Example of Risk||How we mitigate this risk|
|Business||Obsolescence, disruption, and share loss.||Buy leading companies with strong competitive advantages in healthy ecosystems.|
|Financial||Bankruptcy and cash burn.||Buy companies with low debt, high free cash flow conversion, and low capital intensity.|
|Cyclicality||Economic or industry downturn.||Buy companies with highly recurring revenue and clear demand drivers.|
|Valuation||Contraction of price-to-earnings ratio and results underperforming expectations.||Buy below intrinsic value and sell at stretched valuation.|
|Currency||Trading, translational, and transactional.||Diversify by country among stocks and businesses.|
|Liquidity||Excess time to exit positions.||Invest over 90% of the Fund in stocks we can exit in seven days or less2.|
What are some attractive opportunities in the smaller companies’ universe?
FGP believes long-term earnings growth, strong investment results, and ESG compliance are not mutually exclusive. We see attractive opportunities in at least two dozen types of businesses, including:
- UK car insurer
- Provider of cross-border payments from the US to Latin America
- Maker of non-invasive aesthetic treatment devices globally
- Global market research firm
- Two value-added resellers of IT products, one that operates globally and the other in the UK
- Provider of crucial software to insurers globally
- The leading discount retail investment broker in Sweden
- Outsourced HR service provider in the US
About the lead portfolio manager
Ray Szutu, CFA, Portfolio Manager – Global Smaller Companies
Ray joined FGP in 2018 as Research Analyst and was promoted to Senior Research Analyst in 2019. He was appointed the portfolio manager for the FGP Global Smaller Companies Fund at its launch in 2021. He is also a generalist research analyst on the global equity team and a member of FGP’s Investment Committee.
Ray’s career began in 2006 as a mutual fund analyst at Raymond James Ltd. He later moved to AGF Management Ltd. His career as an equity analyst started in 2011 at Sky Investment Counsel and continued at RBC Global Asset Management. Prior to joining FGP, he was an analyst at Invesco Canada covering Canadian and global equities.
Ray is a graduate of Simon Fraser University (BBA) and is a CFA charterholder.
See all our company’s people here.
Other pooled Funds managed by the FGP Global Equity Team
- FGP U.S. Equity Fund
- FGP International Equity Fund
- FGP Global Equity Fund
See a list of all our pooled funds here.
1Since 1994 when MSCI ACWI Small Cap index return data was first available
2We assume trading a maximum of 25% of average daily volume over past 6 months.