Large- and small-cap fund pairs for different regions

It is widely known that smaller companies are cheaper than larger ones, but given geopolitical tensions and economic uncertainty, many investors will want to hedge their bets.

With the help of a range of analysts and wealth managers, we take a tour of the regions to suggest large and small-cap pairings that could prove great double acts for portfolios.

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Global

Schroder Global Sustainable Value Equity and WS Montanaro Global Select

In picking a global pair, Fairview Investing director Ben Yearsley suggests two funds with very different styles – value and quality growth.

Schroder Global Sustainable Value Equity owns around 40 larger-sized companies that are considered environmental, social and governance (ESG) leaders but are nevertheless undervalued by the market. There is a minimum market cap for inclusion of $1 billion (£780 million) although the average-sized holding at present is $45 billion (£35 billion).

He reckons WS Montanaro Global Select is a good complement. It is a focused fund of around 30 small and medium-sized companies that have dominant positions in structurally growing markets. “It builds on Montanaro’s successes in UK and European smaller companies and mainly adds a US element to the process,” says Yearsley. “This is its 'best ideas' fund utilising the skills of an analytical team of 14.”

Capital Group New Perspective & abrdn Global Smaller Companies

For exposure to large caps globally, FundCalibre managing director Darius McDermott suggests the “unique approach” of the Capital Group New Perspective fund.

“The fund has nine portfolio managers, backed by a team of research analysts. Each is given capital to invest their way,” he says.

While they take slightly different approaches, the overall fund invests in “some of the world’s largest multinational companies poised to capitalise on transformational changes in the global economy”.

McDermott adds: “Its structure ensures consistency, minimising concerns about manager change or style drift over the medium or long term. For investors seeking dependable exposure to global blue-chip equities, this is a standout choice.”

He pairs this with abrdn Global Smaller Companies, which “leverages abrdn’s powerful Matrix screening system”. It is one of interactive investor’s Super 60 investment ideas.

“While there may be periods when this fund could lag – such as during commodities' rallies – it is designed for consistent, long-term growth,” says McDermott.

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US

GQG Partners US Equity & T Rowe Price US Smaller Companies Equity

Turning to the US, McDermott likes GQG Partners US Equity for large-cap exposure, paired with T. Rowe Price US Smaller Companies Equity.

The GQG fund is a concentrated portfolio of high-quality companies. The managers are “vicious sellers” with annual turnover at 60%-100%, allowing them to change style quickly and outperform in various market cycles. “It’s delivered impressive returns since inception and we see no reason why this success cannot continue,” says McDermott.

T Rowe Price US Smaller Companies Equity seeks both growth and value opportunities. Manager Matt Mahon runs a diverse portfolio of best ideas. He is likely to have more of a mid-cap bias than peers and will also invest in areas such as biotech, which other generalist funds tend to avoid.

Dodge & Cox Worldwide US Stock & T Rowe Price US Smaller Companies Equity

Casterbridge Wealth is also a fan of the T Rowe Price US Smaller Companies fund, which it pairs with the Dodge & Cox Worldwide US Stock und.

“Our selected pair of funds provides an excellent complement to a core, low-cost S&P 500 fund, enhancing both balance and potential returns,” says senior investment analyst David Winckler, who points to the teams’ resources and the funds’ consistently strong performance.

“While the Dodge & Cox fund’s value bias has led to slight underperformance against the S&P 500 index, a rotation into value stocks, like what we saw in 2022, should result in this fund performing exceptionally well,” he adds.

“By combining these complementary strategies, we have crafted a pair that offers almost zero stock overlap and exposure to diverse risk factors.”

UK

Law Debenture & Aberforth Smaller Companies

For large-cap UK exposure, Peel Hunt likes the “unique structure” of Law Debenture Corporation Ord (LSE:LWDB) with 80% in equities and 20% in an independent professional services (IPS) business.

“The significant and consistent income contribution from the IPS business gives the managers greater flexibility in stock selection,” says Anthony Leatham, head of investment trust research.

Investment trust Aberforth Smaller Companies Ord (LSE:ASL), meanwhile, is a “rare example” of a value strategy in UK smaller companies.

“Given where the value currently presents itself in the market today, it has been focused on the smaller end of small-caps,” says Leatham. “In terms of price/earnings ratios, the trust offers investors access to a quadruple discount opportunity with the UK trading on a discount to global indices, UK small-caps trading on a discount to wider UK equity indices, the portfolio trading on a discount to the UK small-cap index, and shares in the trust trading on 11% discount (as at 10 December).”

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JPM UK Equity Core & Henderson Smaller Companies Trust

Alex Watts, a fund analyst at interactive investor, likes JPM UK Equity Core for active exposure to the UK stock market.

“It’s benchmark-aware, deviating a small amount through stock and sector over/underweight positions, but has still outperformed over the long term,” he says. “Accordingly, the fund is heavily invested in large-caps – companies over £10 billion market cap comprise more than three-quarters of the portfolio.”

Henderson Smaller Companies Ord (LSE:HSL) Trust is also well diversified with 104 holdings, but this time in small-cap stocks.

“While the discount has narrowed since its recent depth in 2022, the trust still trades at a discount of 14%, below a five-year average of 10%,” says Watts. “Given the AIM exposure and high level of gearing at 13%, this trust is an adventurous option for investors who want to access growing UK smaller companies.”

Europe

European Opportunities & Montanaro European Smaller Companies

Matthew Read, a senior analyst QuotedData, rates European Opportunities Trust (LSE:EOT) – the most growth-focused in the Europe investment trust sector.

“It targets larger European companies but seeks out niche, resilient B2B businesses that should thrive across a range of economic conditions,” he says. “High inflation and interest rates have been a headwind, but improving sentiment as these subside should benefit the strategy and a 13% discount offers additional upside.”

Alongside that, he recommends Montanaro European Smaller Companies (LSE:MTE), which focuses on high-quality, high growth small-cap companies. “It’s previously struggled due to its strong growth focus but is the best-performing European fund over one year – a 16% net asset value total return – and there should be more to come as growth recovers.”

Its holdings have “shown few signs of diminishing quality or revenue growth”, he adds, and a 13% discount “looks overdone”.

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Asia Pacific

Matthews China Discovery & Pacific Assets

Fairview’s Yearsley is a “big fan” of Asia despite the relative underperformance over the last few years. “It’s the demographic story that does it for me alongside the economic factors like low debt and higher GDP growth,” he says. “The big questions are whether an investor can stomach Indian valuations and China’s government interference.”

He suggests pairing a China smaller companies fund with a broad-based larger cap pan-Asian investment trust.

For the former, Matthews China Discovery invests in China in the broadest sense – A shares, Hong Kong, Taiwan and US-listed Chinese companies. “The team has more than 5,000 companies with market caps under $5 billion (£3.9 billion) to choose from,” says Yearsley.

For the latter, Pacific Assets Ord (LSE:PAC) is managed by Asia specialist Stewart Investors. “China doesn’t tend to feature that heavily, partly down to ESG issues as sustainability is at the heart of the process,” he adds.

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Emerging markets

Federated Hermes Global Emerging Markets & Fiera Emerging Markets

Wealth manager WH Ireland highlights two complementary emerging market (EM) funds.

Research analyst Carrie Song says: “Federated Hermes Global Emerging Markets incorporates a top-down framework targeting supportive economies, with regional and sector active weights (the amount it differs versus the index) within 3%. Its balanced thematic exposure to emerging market structural growth drivers makes it a core holding.” 

“By contrast, Fiera Emerging Markets focuses on less-efficient markets, particularly smaller capitalisation and under-covered regions, including Vietnam.”

Song adds the fund has more than half its assets in small and mid-caps (versus 20% for the index) and a high active share of around 90%.

Song points out: “With Federated Hermes providing broad, steady exposure to quality growth, and Fiera providing differentiated high-growth opportunities, together they offer a diversified, attractive risk/reward profile, providing balanced access to structural growth and higher-quality emerging market opportunities.”