Small cap companies offer opportunity for growth

KUALA LUMPUR: Investors should look at investing in Asian small capitalisation equities as they have outperformed in 10 out of 15 years and have twice the opportunity set across sectors, according to Manulife Asset Management.
Small and mid-cap companies comprise those with market capitalisation of US$3 billion (RM10.68 billion) or less.
Manulife Asset Management head of Asia Pacific Equities Linda Csellak said small cap equities tend to outperform in both upward and downward trending markets. However, in times of significant market declines, small cap equities tend to under-perform. Once market conditions stabilise, small cap equities typically recover more rapidly than large cap equities.
"Since they (small cap equities) underperformed last year, this year is looking much better and they are starting to outperform again. The odds are they're going to perform in any given (Asian) markets," she said at a media briefing to introduce the Manulife Asian Small Cap Equity Fund here yesterday.
"They are more volatile than large cap but not a whole lot. In general, on a longer term timeframe, not much higher volatility."
Csellak, who is based in Hong Kong, said investors get higher exposure to growth sectors with the small cap universe.
Comparing both large cap and small cap indices, the financials sector make up 40% of the MSCI AC Asia Pacific ex-Japan Large Cap Index and 20% of the MSCI AC Asia Pacific ex-Japan Small Cap Index. The consumer discretionary sector, on the other hand, comprises 5% the MSCI AC Asia Pacific ex-Japan Large Cap Index and 19% of the MSCI AC Asia Pacific ex-Japan Small Cap Index.
"There's nothing wrong with banks, properties, insurance companies (financial sector) but I would argue that sometimes unless you get a big liquidity rally, those stocks don't always outperform massively.
"The information technology sector has a similar weight in both small cap and large cap market but what you do get a lot more in with the small cap universe is consumer discretionary. These are the more innovative business models and companies that can grow faster," said Csellak.
Asia Pacific ex-Japan small cap universe also has five times more stocks than the large cap universe, with over 1,800 stocks.
"There's a tremendous opportunity in this asset class," said Csellak.
Growth in Asia is also accelerating and the pace is faster relative to the rest of the world, driven by margin rebound, thanks to lower oil price and reduced cost pressure.
Csellak said small and mid-cap stocks in Asia suggest ample opportunities to benefit from pricing inefficiencies and catalysts that unlock value.
"Earnings are coming through. Gradually companies are getting some pricing power and volume growth is coming through better."
The Manulife Asian Small Cap Equity Fund is a feeder fund that invests in the target Manulife Global Fund – Asian Small Cap Equity Fund, which is managed out of Hong Kong by Manulife Asset Management (Hong Kong) Ltd.
The fund gives Malaysian investors access to companies listed on exchanges across Asia Pacific, of which the vast majority are small or mid cap. The fund allows investors to invest in small caps at the early stage of a company's growth, before they become recognised by the general market and re-rate. It taps into a large, diversified universe of under-researched companies most poised to benefit from the region's growth.
Malaysia is the sixth market the investment strategy has been introduced to, after Hong Kong, Singapore, Taiwan, Japan and Thailand.
"We prefer companies with improving return on equity, free cash flow and earnings sustainability. We believe that stock-specific small cap opportunities exist in all Asian markets and that a bottom-up investment strategy is key to delivering performance."
Since the inception of its target fund in 2006, the cumulative return is 154.67%, which translates to an annual return of 15% to 17%. The target fund's asset under management stood at US$440 million as of March 2015.
The Manulife Asian Small Cap Equity Fund is a wholesale growth fund that was launched on April 8, 2015 and aims to provide long-term capital growth. It is suitable for sophisticated investors with personal net assets of over RM3 million.