Vantage: James Thorne on the smaller companies’ effect

Published on 24 June 2022

In the final episode of this series, Vantage talks to James Thorne, small- and mid-cap specialist at Columbia Threadneedle Investments. James is a strong advocate of the smaller companies’ effect. We ask whether the smaller companies’ effect is still intact in an environment of rising inflation or whether you would be better off investing in larger-cap companies for their pricing power and liquidity protection. James’s response reflects his approach to managing his clients’ money, that is he takes the emotion out of the decision and relies on the data. History shows that the smaller companies’ effect still delivered returns in the inflationary periods of the 1970s. James targets a 15% pa return for his funds and explains how this breaks down into a return for equity exposure, the smaller companies’ effect and active management, and reminds us that 15% pa doubles your money every five years. The stock-picking approach looks for businesses that have a good-quality product for which they can charge a fair price, but can expand without relying on requiring further capital. The investment process involved working through the financials, using significant internal resources to benchmark the business, as well as getting out and meeting the business. James illustrates this by talking about Hotel Chocolat (HOTC.L). Areas of growth that attract him include geospatial software (eg 1Spatial (SPA.L)) and lithium, where the fundamentals suggest that price will outgrow inflation.

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