Global SMIDs see 'best valuation opportunity' in a decade
Despite recent underperformance compared to its large-cap counterparts, the global small/mid-cap sector is positioned for outperformance coming out of the economic crisis created by the COVID-19 pandemic, according to Cambridge Global Asset Management.
The asset manager’s principal and portfolio manager, Greg Dean, said small-cap funds had not only trailed their large-caps counterparts over the last six months, but also over two years.
“Late cycle that can be quite common, because you see things like increased credit risk in smaller companies,” Dean said.
“Oftentimes late cycle is when you see a lot of strong growth in some of the cyclical stocks that are more government budget oriented that would predominately be in the large-cap market.
“Then there’s also the phenomenon of the half dozen stocks in the NASDAQ, none of those are small caps nor were they a couple of years ago.”
Global equity versus global small/mid-cap sector over the previous two years to 30 September 2020
Dean said he was still bullish on small-cap funds as he believed we were entering an early cycle of recovery.
“Two things have always been important to us: finding management teams that add value and avoiding bad balance sheets,” Dean said.
“We’ve seen a lot of businesses that we own recover much faster than the stockmarket because they didn’t put themselves in any precarious situations in the uncertainty that we saw earlier in the year.
“Now they’re very well positioned if things remain tough – to make acquisitions and take advantage of the current stress.”
Nick Cregan, Fairlight Asset Management portfolio manager, said the small and mid-cap sector was in a period of its most pronounced underperformance compared to the large-cap sector since the Global Financial Crisis (GFC).
“Which leaves it in the best relative valuation opportunity that we’ve seen in a decade,” Cregan said.
“Looking back over the last 100 years of data at the worst 25 monthly sell-offs over that period, the small-cap sector has gone on to outperform the large-cap sector on a one, three, five and 10-year basis.
“That combination of the underperformance and the historical data of how small-caps outperform after a crisis, leads us to believe this is one of the best setups we’ve seen in quite some time.”
According to FE Analytics, within the Australian Core Strategies universe, the global small/mid-cap equity sector returned 5.16% over the year to 30 September, 2020.
WCM International Small Cap Growth returned 32.5%, followed by Prime Value Emerging Opportunities (19.06%), Cambridge Global Smaller Companies (13.3%), THB International Micro Cap (13.2%), Ellerston Global Mid Small Unhedged (9.7%) and Fairlight Global Small & Mid Cap (9.48%).
Best-performing global small/mid-cap funds over the year to 30 September 2020
AUTHOR
Chris Dastoor
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