Roy Keenan from Yarra Capital Management shares insights with James Dunn from The Inside Network on the role of active management. The Inside Adviser
After the Hayne Royal Commission many advisers decided to steer away from large dealer groups in favour of becoming self-licensed. In the last six months, however, that trend has taken an abrupt turn.
Passive flows creating opportunity in ‘less efficient’ global smalls
Global smaller companies, defined broadly as those valued anywhere between $300 million and $5 billion, are offering one of the most compelling valuation opportunities in 20 years, says Simon Wood of Ausbil Investment Management.
Speaking at The Inside Network’s leading Equities and Growth Assets forum this month, Wood highlighted the unique opportunity set and its long-term track record of outperforming larger companies by as much as 3 to 4 percentage points a year as a key reason why advisers should be adding an exposure today.
“The real sweet spot are the small cap leaders that can transition from small to large,” he explained, providing a comparison against the S&P500 Index, which is seeing the largest concentration into just a few companies than at any other point in its history.
One of the main reasons behind this concentration risk has been the shift to passive solutions for global equity allocations along with the popularity of exchange-traded funds (ETFs) that simply buy whichever companies are in the index. “This means the smaller companies market is less efficient every single year,” according to Wood, and ripe for active management as a result.
Combine this with the recent changing to broker research funding in Europe and it is not uncommon to see just a few analysts from their own domestic market covering a high-quality stock. One such example is QT Group (Nasdaq Helsinki: QTCOM), a Finnish company that writes code on which everything from LG to Hyundai car technology is based.
He compared QT Group to the now struggling Meta Platforms (Nasdaq: FB) – the former Facebook – which is a company covered by more than 63 analysts; none of whom has upgraded earnings by more than 50 per cent in the last 12 months. In contrast, QT Group is researched by just five local analysts, few of which are known outside Finland, but 100 per cent of whom have upgraded their earnings forecasts by more than 50 per cent in the last 12 months alone.
Naturally, the share prices of QT and Meta have diverged, which is put down to the “unrecognised growth” the former has been able to deliver, once again proving that share prices, despite the commentary on interest rates, continue to track earnings more than anything else.
According to Wood, the smaller companies index, measured by the Russell 2000, is trading at “levels of valuation we haven’t seen for 20 years,” which makes now an “opportune time for allocating” to the sector. The maximum discount to their large cap peers has historically occurred at the beginning of a Federal Reserve hiking cycle, which just so happens to have started in March this year.
“It’s all in the earnings-per-share growth and forecast growth that drives share price growth over time,” he explains. Concluding, he reiterates the opportunity set for active management “small caps have been a great asset class over time. We’re seeing a huge concentration in large caps, making small caps rather attractive. Now is the time to flip the script into small caps.”
