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May 22, 2019

Differing perspectives on what Mifid II means for small caps

Some feel regulation offers opportunities for small caps, others see smaller-cap shares falling

It is still open to debate what the impact of Mifid II will be on small caps, and recent contributions from two market players offer different perspectives.

Trevor Gurwich, who manages small-cap assets at Kansas City-based American Century Investments, recently spoke at the presentation launch of his company’s small-cap fund to European investors, pointing out that small caps can benefit from opportunities created by Mifid II.

He noted that 13 percent of the companies in his fund’s investable universe had no analyst coverage at all and Mifid II’s research rules could have the effect of cutting the number of analysts covering smaller companies even further. In doing so, however, the rules would increase the number of opportunities for investors to find returns themselves before others do.

Gurwich said: ‘People make money from stocks because they identify opportunities before others. The number of analysts is probably going to go down with Mifid II and that’s going to create more opportunities. As long as it doesn’t obliterate the analyst community, Mifid II will increase the opportunities.’

His view of Mifid II could, in part, be attributed to his approach, which differs from other managers that invest in companies with a view to holding on to them for some years; by comparison, Gurwich aims to keep companies in his portfolio for two years at most.

‘We are very programmatic with our companies,’ he said. ‘Our typical time horizon is 12-18 months and we want to see visible improvement in that time period. We believe earnings drive stock prices and you often have a lot of behavioral biases in the minds of analysts, and we are usually ending our position when you start to see the company’s fundamentals exciting analyst expectations. You are taking advantage of that earnings growth and you get the biggest bang for your buck because you catch the surprises.’

Offering a differing view, Steven Fine, CEO of London-based broker Peel Hunt, said Mifid II will lead to smaller-cap shares performing poorly over the longer term.

Speaking at an event at the UK parliament, Fine said the impact of Mifid II has been a decline in demand for small-cap research: ‘The impact is likely to be less research being produced on smaller companies, and that will lead to smaller-company share prices falling.’