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‘Consensus is the opportunity’ in global small caps


‘Consensus is dumb’.

These were the closing comments of leading global small and mid-cap (SMID) equity manager Ned Bell at the recent Inside Network Equities and Growth Assets Symposium.

Presenting on the topic ‘Size Matters’, Ned Bell, Chief Investment Officer, explained to Australia’s leading financial advisers why the opportunity set in the SMID universe had never been better. Combining with Ausbil’s Tobias Bucks, the two discussed how the evolution of broker research has resulted in inefficiencies and great opportunities for active global managers.

  • On the one hand, Bell outlined how German and Japanese analysts are painfully conservative when it comes to the earnings expectations for SMIDs, whilst US analysts tend to be more bullish. Similarly, the dominance of hedge funds in global trading volumes means they are now the bigger supports of research efforts, which by their nature have become ever more short-term.

    ‘Looking beyond the end of your shoes’ is how Bell described the situation as he highlighted the fact that the earnings recovery in his universe of stocks is expected to be over 250% in 2023. He described how the pandemic had become the perfect storm for Australian-based active investors, with extensive global travel replaced with time efficient meetings with management, primarily directors and C-suite executives rather than investor relations as it has been in the past.

    MSCI defines the universe for global SMIDs as the smallest 28% of each individual country’s index, however investors can no doubt appreciate that the smallest companies in the US are far different to those in say Norway, hence some nuance is required. For this reason, Bell defines SMID as the bottom 28% of the MSCI World Index as a whole. Similarly, the diversity and quality of global SMIDs compared to Australian small caps is significant, these companies are significantly larger, reaching as much as US$31 billion in market cap.

    Selecting from the 5,000 companies that make up the Global SMID universe is by no means easy, yet the gains can be fruitful with companies ranging from NVIDIA, ASML, Netflix and Illumina coming from this cohort in the 2000s. Commenting on this, Bell highlights the complementary role that SMIDs can play alongside the incredibly popular large cap growth stocks, just five of which have driven 28% of the total return of the entire MSCI Index over the last three years.

    He sees now as an opportune time to find other growth avenues to complement what are becoming highly crowded trades. Global SMIDS have outperformed more popular emerging market strategies by around 4%pa over the last 25 years and done so whilst experiencing significantly less volatility.

    This has been delivered by seeking those companies that are in the ‘sweet spot’ of their growth profile having been through their ‘adolescent’ stage. The days of capital raisings are gone, but significant and consistent double digit profit growth remains ahead.

    Less passive and ETF money is being directed to these names offering greater opportunity for differentiation and to identify earnings surprises. One such recent example is Pool Corp, an installer and service provider to pool owner’s, that beat consensus estimated by over 90% in April.

    Bell also sees great opportunity in the healthcare sector after a year in which elective surgeries were delayed. He highlights the fact that unlike many other sectors of the economy, most surgeries are imperative to the people involved and hence revenue will ‘catch up’ unlike in other industries. 

    Ultimately, the group sees greater opportunity than ever in the SMID sector with their focus remaining on ‘good franchises’ and companies with pricing power along with the ability to continue to grow earnings.

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