My colleague, Scott Francis published an article in Friday's edition of Alan Kohler's Eureka Report where he looked at the suitability of including an investment in small companies within an investment portfolio.

As Scott's article points out, the ASX Small Ordinaries Index has provided strong returns since the beginning of March this year.  Well ahead of the top 100 companies on the index.  However, 2008 was not such a rosy picture with this area of the market providing a return much worse than large companies.

This recent performance provides insight into how to view small companies and how to use such exposures in an investment portfolio.  It is a story of risk.  Smaller companies are viewed to be riskier investments with greater probability of failure but also greater flexibility to grow in good times.  To invest in a riskier asset class investors should expect a higher return for taking on that risk.

In today's podcast I wanted to add some extra details to Scott's article by particularly looking at how this firm's approach to accessing small company exposure has performed over time.

A Clear Direction utilise Dimensional's Australian Small Company and Global Small Company Trusts to access this asset class.  These trusts commenced in late 2000 so I have looked at the data since the Australian Small Company Trust commenced in November 2000 up until the end of June 2009.

The following table summarises the results

These results show that the Dimensional Australian Small Company Trust has performed in line with the S&P ASX Small Ordinaries Index over the past 6 months.  Beating the top 100 companies by over 14%.  However for the year the trust lagged the top 100 by over 5% but performed 4% bettercompared to the Small Ords index.  Since inception in 2000, the trust has provided a premium of 1.8% over the large 100 (after fees).  Over that period the Small Ord Index actually under-performed the large 100 companies.

Globally, the Dimensional Global Small Company Trust has provided a premium over the MSCI World ex Australia Index for every time period except for the 3 year returns.  The premium since November 2000 has been over 6%.

The results seem to support the proposition that a small company exposure can provide a premium compared to the large companies on an index.  Dimensional's trusts have achieved this.  However, a point to note is that the premium is not always present and there are periods where small companies have under-performed and strongly so.  At A Clear Direction this is another reason why we still include large company index exposure - to provide asset class diversification and smooth out portfolio volatility.  For clients who want to take on more risk and by doing so seek higher returns we can tilt portfolios towards a greater holding of small companies (as well as value companies and Emerging Markets).  For those who want less volatility within their growth asset exposure we can tilt away from small companies.

If you have any questions or comments please do not hesitate to be in contact.

Have a great week.

Regards,

Scott Keefer