Macro-economic shocks hit global SMIDs
No funds in the global small/mid cap sector have made a positive return in 2020, as macro-economic shocks in the globally economy leave a grim outlook for the rest of the year.
According to data from FE Analytics, within the Australian Core Strategies universe, the global small/mid cap sector had an average loss of 12.20%, year to 30 April.
The best performer so far this year was WCM International Small Cap Growth which lost 1.68%, followed by Fairlight Global Small & Mid Cap (-4.18%), Bell Global Emerging Companies (-4.67%), Cambridge Global Smaller Companies (-5.86%), and Ellerston Global Mid Small Unhedged (-7.67%).
Ian Carmichael, Fairlight Asset Management’s portfolio manager and partner, said smaller companies were typically less diversified by geography and industry compared with large companies, and were perceived to be more at risk of macro-economic shocks.
“As a consequence they usually, but not always, sell off a little more than larger companies in periods of extreme market stress,” Carmichael said.
“The COVID-19 sell-off, which began in February 2020 has followed this pattern with the share market returns to small companies underperforming large ones.
“However, over the long-term small companies have outperformed large companies, despite temporary set-backs like the one we are currently experiencing.”
For the year to 31 December, 2019, Fairlight’s fund led the sector with a return of 36.76%, while the sector average was 24.59%.
Fairlight had the best of both worlds, by offering a return profile that delivered in the good times but with enough defensive characteristics to protect it in difficult markets.
“Given this focus, we would have been disappointed not to have outperformed during the COVID-19 sell-off,” Carmichael said.
“Maybe the more surprising result was the strong outperformance in 2019, which we mostly attribute to classical stock selection.”
When it came to market recovery, Carmichael said some markets – like the US and UK – would be more impacted than others, because of the differences in the government response to the virus.
“We expect the next couple of quarters will see some fairly ugly financial results as a consequence of the disruption to economies caused by both COVID-19 and the social distancing efforts to contain it,” Carmichael said.
“Looking forward to 2021 and beyond, we believe there is more room for optimism and we are particularly excited about valuations in the Global SMID universe.
“On our numbers, the absolute valuation of the Global SMID asset class is at a 10-year low which bodes well for future returns, and the valuation relative to large companies is almost off the charts cheap.
“Given the starting point it would be very surprising if Global SMID companies didn’t go on to outperform large companies over the next five years.”
Best performing global small/mid cap funds year to 30 April 2020
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