International equity investors will begin to look towards smaller companies due to strong growth in availability according to one investment group.
Smaller companies have long been a component of an Australian equities’ portfolio and now Zenith Investment Partners believes international equity investors will follow suite.
Zenith said that the inclusion of international small companies in a broader international equities portfolio will significantly enhance returns without attracting greater risk.
Zenith head of equities Quan Nguyen said that an active investment approach would produce superior outcomes relative to a passive one when it came to equities.
“Active international small cap fund managers are better placed to generate excess return than their large cap counterparts, and we believe an active investment approach should produce a superior outcome relative to a passive approach,” he said.
Mr Nguyen did say that while smaller companies provide greater returns, it does come with a higher volatility, with a standard deviation of 13.4 per cent for smaller companies compared to an 11.6 per cent for the broader index.
“While international small caps have the potential to provide investors with high levels of returns, the elevated volatility levels of this asset class can make it difficult to achieve superior returns over the long-term when measured on a risk-adjusted basis.
“However, Zenith believes this should not deter investors from seeking an international small cap exposure,” he said.
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