The Montanaro European Smaller Companies Fund

3 minute read

We take a closer look at the Montanaro European Smaller Companies Fund.

Who's it for? Confident investors

A lobster pot is a device used by fishermen to catch lobsters. It is left on the sea bed and the bait lures the creatures inside. But once inside, the one-way entrance traps the lobster, making it impossible to get out. Investing in smaller companies has sometimes been referred to as ‘lobster pot’ investing – easy to get into, but impossible to get out of. It can be true that certain parts of the market can be notoriously illiquid, which means shares can sometimes be difficult to sell. To overcome this, you need to take a different approach to investing in smaller companies. And the Montanaro European Smaller Companies Fund does just that.

Why smaller companies?

The central argument as to why invest in the shares of smaller companies is two-fold. First, it is in the belief that smaller companies are often regarded as the large companies of tomorrow. Identifying them early in their life can be very profitable, but the time it takes for these companies to succeed can be long. Secondly, there are far fewer investors following the fortunes of smaller companies than there are following the large companies. As a result, much of this market is simply overlooked and misunderstood, which could present investment opportunities for those who have the time and resources to dig deeper.

The approach at Montanaro

In order to avoid the lobster traps, the team at Montanaro employ what they call a ‘high quality’ approach. They look to avoid the pitfalls that let so many investors down when investing in this part of the market. What this means is looking for companies that display a number of characteristics, including the following:

• Profitable – avoiding the ‘jam tomorrow’ companies promising riches in the future, and stick with companies that are making a profit today.
• Growth market – each company needs to be operating in a market that is growing. Even the very best company operating in a shrinking market is best avoided.
• Strong management – one of the most important factors when investing in companies is the strength of the team that is running the company. Even more so in the world of smaller companies.

What sort of companies pass ‘the test’?

A good example would be Thule – the Swedish company that makes, amongst other things, the rooftop storage boxes and bike racks for cars. It’s probably the most recognisable brand of roof top boxes, operates in a growing a market, and is managed by a strong management team. It’s probably not what you think of when imagining what a ‘high quality’ smaller company looks like, but Montanaro invests in about 60 companies just like Thule. And hopefully avoids the lobster pots.

The Montanaro European Smaller Companies Fund is a fund worth considering if you are thinking of investing in European smaller companies. If you are interested in investing in other parts of Europe, away from the smaller companies, there are more funds on the Barclays Funds List, including BlackRock European Dynamic Fund and the Jupiter European Fund. Find out more information about all of these funds. Remember that investing in smaller companies is higher risk than investing in large companies.

To diversify your investment, you may like to consider our own Barclays Ready-made Investments (RMI). The RMI are just one example of a range of diversified funds which allow you to select the level of risk you are most comfortable with. These multi-asset funds invest in passive funds across a range of asset classes and regions, offering a globally diversified one-stop solution for investors. Ready-made Investments are not the only funds that we offer and they won’t be appropriate for everyone.

Whichever option you choose, you must accept that all investments can still fall in value as well as rise and you might get back less than you invest.

Investments can fall in value. You may get back less than you invested. These are our current opinions but the future, as ever, is uncertain and outcomes may differ. Past performance of the fund and its manager are not a reliable indicator of their future performance.

We don’t offer personal investment advice so if you’re unsure you should seek that independently. Funds are designed for the long term so you should only consider them if you can stay invested for at least five years.

Read the Assessment of Value report [PDF, 683KB] for funds run by Barclays.

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The value of investments can fall as well as rise. You may get back less than you invest. Tax rules can change and their effects on you will depend on your individual circumstances. Smart Investor doesn’t offer personal financial advice. If you’re not sure about investing, seek independent advice.

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