Fund manager view | Global equities: Marlborough’s Simon Wood weighs up big and trendy versus small and niche

As advisers and investors dust off their New Year’s resolutions and vow to think differently in 2026, Simon Wood makes the case for kicking one of the market’s most persistent bad habits: blindly following the crowd. In this wry year-end reflection, Wood, the co-manager of the IFSL Marlborough Global SmallCap Fund, explains why the next twelve months in global equities may reward those prepared to look beyond the usual big, fashionable names and towards smaller, niche businesses that have been hiding in plain sight.

Active fund management is frequently perceived as an exercise in self-importance. Many critics regard it as a form of investing which revolves exclusively – and even unhealthily – around what a particular manager thinks.

Although the cult of the investment guru may lend credence to such views, I would argue that the reality is very different. In my opinion, active fund management should instead revolve around what everyone else thinks.

Take the sphere of global equities. A manager will undoubtedly have their own thoughts on why a specific business is or isn’t worthy of interest, but there’s a compelling argument for accepting it’s the thoughts of others which truly count.

Why? Because if there are grounds to infer everybody else is mistaken, as is sometimes the case, then we may just have an unusually promising investment proposition on our hands.

This, of course, is the stuff of contrarianism. There are enduring misconceptions clouding the picture here, too, foremost among them the lazy assumption that such an approach amounts to little more than automatically backing X when the herd is backing Y.

It’s far from so perilously simple. Contrarianism isn’t a one-dimensional question of going against the flow for the heck of it. It’s a matter of recognising what others fail to discern – which in most instances, ideally, is a capacity for long-term growth and outperformance.

So where are such opportunities likely to be found? And why aren’t more “experts” aware of them? This brings us to the arena of smaller companies and, within it, the appeal of niche businesses.

The search for an edge

The bulk of investment analysis in the world of equities is centred on businesses that have sizeable market capitalisations. Especially in the US, large-cap and mega-cap companies are likely to be “eyeballed” by hundreds of sell-side analysts.

There are several reasons for this longstanding focus, including how analysts are remunerated. But the straightforward upshot is that most smaller businesses garner scant attention – or even none at all.

This is reflected in the make-up of many passive funds, which tend to be heavily skewed towards the same household names. In recent years, for example, the so-called Magnificent Seven technology stocks have come to have unprecedented weight in some indexes.

Such a level of concentration can work well if the chosen handful of companies prosper in perpetuity. But the proven benefits of diversification suggest it may be prudent to cast the net more widely.

For a fund like ours, this is accomplished through a combination of quantitative and qualitative research. The principal steps range from a broader assessment of regions and sectors to direct engagement with individual businesses, their suppliers and their customers.

Having carried out a deep dive into a company and its potential for value creation, we build a model to project future earnings. It’s only at this point that we finally investigate the market consensus to see if it chimes with our conclusions or is manifestly at odds with them.

The aim is to identify an edge – a would-be growth story that the herd has either misinterpreted or completely missed. This can mark the dividing line between merely being the market and actually beating it.

Unearthing hidden gems

Niche businesses can play a substantial role in ticking the required box. Take Sanlorenzo, an Italian yacht-building company that was founded in 1958.

You might imagine the yacht-building market is itself pretty niche. Yet even in this rarefied space there’s a distinction between mass-produced and made-to-measure offerings.

Sanlorenzo falls firmly in the latter camp. It’s a boutique manufacturer that constructs only a limited number of yachts per year, tailoring each to a client’s exact specifications.

According to our analysis, its investment attractions include a strategy of vertical integration via mergers and acquisitions. Going forward, establishing partnerships with key suppliers should enhance its margins.

The company is also committed to achieving carbon-neutrality by the end of the decade. It’s already experimenting with fuel-cell, hybrid, methanol and hydrogen propulsion, which could give it a first-mover advantage against a backdrop of mounting regulatory and social pressure to meet net-zero targets.

In addition, like so many hidden gems, Sanlorenzo isn’t the sort of business that chases trends for the sake of it. It’s a trailblazer, not a follower. This helps set it apart from many of its peers.

And so we end up back where we started – because not chasing trends for the sake of it is also what sets good active managers apart from many of the participants in the global equities market. Isn’t this, too, an underappreciated niche that could be well worth exploring?

Simon Wood is co-manager of the IFSL Marlborough Global SmallCap Fund.