Investors and advisers looking at global small-cap stocks need to avoid the temptation of selling out too soon in turbulent markets, according to a Morningstar report.
"They have added value consistently over time and above that of their larger-cap counterparts - but only if held through the cycle," Morningstar fund research analysts said in the report.
Morningstar's "Small-cap International Equties Sector Wrap-up" report showed that timing was everything in the sector. It said global small caps posted robust gains in the three years to 2006, attracting many investors to the sector.
However, many of the same investors would have been tempted to sell as the global financial crisis slammed markets and those who did would have missed the subsequent rebound.
"Even the world's greatest investors have not been able to time markets consistently with success. This suggests that investors and advisers need to consider carefully whether exposure to an inherently volatile asset class such as global small caps matches the investor's investment time horizon and risk tolerance," the report said.
Morningstar's fund research analysts did not give any of the eight global small-cap funds their top highly recommended rating, but gave Hunter Hall Global Ethical, Hunter Hall Value Growth and Schroder Global Small Companies a recommended rating.
Morningstar analyst Mark Laidlaw called Hunter Hall Global Ethical a "first-class offering" on the back of its extensive research, original ideas and long-term investment mentality.
"Although returns can markedly lag those of peers and the benchmark over shorter periods, we see a lot of merit in this contrarian manager's unashamedly eclectic approach," Laidlaw said in a recent report.
As for Hunter Hall Value Growth, he said the sometimes bumpy ride was usually worth it. "The spectacular longer-term results speak for themselves," he said.
Morningstar analyst Tim Wong, commenting on the Schroder fund, said: "The seasoned managers, large analyst base and sharp focus on risk make Schroder Global Smaller Companies a more than credible option to navigate through this volatile sector."
