“All the people involved in this fund are stockpickers, so there is no macro-overlay or any of this,” Nick Sheridan, portfolio manager at Janus Henderson, stressed from the onset during his presentation in Luxembourg on 21 January 2025. He noted that the Horizon global smaller companies fund is “geographically neutral” and that stocks are exclusively picked from the MSCI global small cap index.
Significant past outperformance versus its reference index
According to the JH’s marketing material, the “Horizon global smaller companies IU2 USD” fund, launched on 6 August 2019, managed to outperform the MSCI global small cap index by 650 bps (annualised performance of 14.8% vs 8.3%) on a net fee basis since inception. Importantly, it systematically and significantly outperformed every year except for 2022, when the underperformance was only -20 bps.
You get this opportunity on steroids
Sheridan also thinks that a greater operational performance at the company level should pay off over the long term. Indeed, he showed that global small caps outperformed global large caps by around 150bps since 1997. Operational performance grew by 7.5% for the former against around 5.0% for the latter.
Outperformance against global large cap may persist
Interestingly, he noted that the P/E multiple expanded for global large caps whereas it contracted for global small caps. “Therein lies the opportunity, or part of the opportunity,” argued Sheridan.
Sheridan suggested that deglobalisation over the next decade may foster supply-chain nearshoring and diversification in two sectors in particular: industrials and materials. He pointed out that these sectors carry a higher weighting in the MSCI global small cap index versus the MSCI world index.
He thinks that “you get this opportunity on steroids… should president Trump enact some tariffs that he’s talking about” because economic growth may shift to the US, which accounts for 66% of the MSCI global small cap index.
Moreover, JH’s marketing material outlined that that the top ten holdings in MSCI world small cap index account for only 1.7% of the index compared to 24.1% for the MSCI world.
Elsewhere, Sheridan also contended that takeovers occur more often in the small cap space, with large companies buying the smallest one with a “very nice premium” of around 30%. Besides, he already noted a pick-up in M&A activities in the global small cap universe, a phenomenon that will likely carry on with lower interest rates.
An overlooked market
Contrary to the MSCI world large cap index, where almost all stocks are covered by more than 10 sell-side analysts, about one-third of the MSCI global small cap index is covered by one to five analysts. “Because less people look, if you do get your stock selection right, you get far more bang for your buck,” commented Sheridan.
“So unless you think the world has changed… or from an operational performance that small caps will never improve, then this is an opportunity.” Indeed, global small caps display a discount of 18.4% for over the global large caps, a level not seen since 2012, 2000 and the 1970s. Historically, global small caps carried an average premium of 12% since 2009. To emphasis his point, he noted that return on equity is forecast to double, supported by lower interest rates.
Experienced team of PMs applying a standardised style
“This is a business in which the older you get, the more history rhymes.” Sheridan commented that their investment style “will never change” and his focus is on the underlying fundamentals of the company. “That actually matters the most, that drives the share prices.”
As a team based in London with colleagues based in US and Asia, he explained that each PM can sell at any time upon negative and unexpected events, but “they can’t invest in their favourite stock.” The investable universe is maintained by Sheridan, ensuring that the investment style is preserved.
On valuation, Sheridan explained that “we look at what the incremental return on invested capital is for any given company.” In other words, a company generating a return of 25%, whereas past average returns used to be 20%, will be looked at favourably given the greater growth potential.