Don’t underestimate the impact of going small

23 May 2022

Kirsty Desson, Investment Director, abrdn

The future is being built by often more niche and more nimble companies where new ideas and innovation can thrive, says Kirsty Desson, Investment Director, abrdn. Investors can benefit by investing in smaller companies at an early stage.

They say good things come in small packages and indeed, some of the world’s most innovative companies sit within the small cap market. Whilst it’s the biggest corporations that usually grab the headlines, we think it’s worth exploring some of the creative and future-forward ideas of smaller companies that are already changing the world.

Some of today’s biggest corporations were mere home-office start-ups less than 20 years ago – take Mailchimp, Shopify and GoPro as excellent examples. With two thirds of the world’s companies qualifying as small cap, it’s our view that if you don’t have some of your portfolio invested in smaller companies, you are possibly missing out on the next big thing when the smaller companies of today become the much bigger companies of tomorrow.

The future is being built by these often more niche and more nimble companies where new ideas and innovation can thrive. Smaller companies are making strides in every region, particularly in countries with a culture of entrepreneurialism.

Green agenda

Larger companies have become very good at publicising their ESG credentials, understanding that consumers in particular are increasingly making more ethical choices. It is true that smaller companies tend to talk less about what they do, preferring instead to focus on their business operations and getting things done. That’s why globally, smaller companies can offer some of the best untapped opportunities from an investor point of view.

For those of us extensively researching such companies, it becomes clear that many small companies are playing a vital role in driving the green agenda in the long term. Every day we see headlines reminding us about the climate crisis and the urgency to find alternative energy sources – something that has taken on a whole new meaning since the start of the conflict in Ukraine.

French company GTT is playing a role by developing sophisticated equipment to transport liquid natural gas (LNG), and specialist technology for using LNG as a shipping fuel in place of highly polluting heavy marine oil.

Looking to Asia, Sinbon Electronics is a Taiwanese company that makes the specialist electrical components needed in wind turbines, electric vehicles and even in medical machinery such as surgical robots. Another Taiwanese company, Voltronic Power, creates energy storage solutions and solar inverters, making solar power more accessible for use in people’s homes.

These companies are finding innovative solutions to help address some of the biggest problems facing the world today and there’s some really exciting opportunities for investors.

Indeed, smaller companies have been behind some of the biggest innovations in healthcare and technology. US company Insulet for example, is creating the kind of smart, high-tech insulin pumps that can transform the lives of diabetics. Rather than having to inject themselves with insulin several times a day, Insulet have created wearable pods that administer medications throughout the day.

Meanwhile, data from smart devices and medical institutions is being used by JMDC in Japan to help drug companies improve outcomes and the accuracy of health checks and monitoring.

Cloud computing, data, automation and digitisation are all thriving sectors and there is now so much data in the world that major investment is being directed into its infrastructure. At the forefront is Fabrinet in Thailand, a world leader in optical components for data networks. As demand for high speed and large capacity communications increases, optical interconnect technology is becoming an emerging technology for solving the bandwidth problems being experienced globally. This market is set to grow exponentially over the next twenty years and it’s expected that the small companies at the forefront of this technology will also be on a path to growth.

It’s worth remembering then that the larger companies we read and hear about every day, didn’t start out that way. Amazon was created in a garage before becoming an online book store and then evolving into one of the worlds biggest and most successful companies.

Small companies are full of innovative, creative thinkers who may have struck on the next big idea. Sometimes it pays to go small.

[Main image: patrick-tomasso-nWvWBV0sv04-unsplash]

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