‘Some smaller companies more resilient,’ fund manager says

Oct 21, 2020
Speaking at the IR Magazine Forum – Small Cap 2020, three fund managers share their views on the market and their IR advice for small caps

The Covid-19 pandemic has been a catalyst for some of the developing challenges faced by small and micro-cap companies, including targeting sell-side coverage, visibility to institutional investors and a need to tell a purpose-led corporate story that considers material ESG factors while on a limited budget.

At the early stage of the Covid-19 outbreak in the US, investors flocked to safe bets like mega-cap technology stocks, recognizing an opportunity to increase their holdings at lower prices. But as the pandemic has continued, small and micro-cap companies – which many investors see as the real drivers of portfolio growth – have proven themselves to be agile enough to outperform their larger peers.

Earlier this month, Trade Station reported that the number of Russell 2000 members hitting 52-week highs was at its highest level in two years. These were among the talking points for the panelists during a fund manager Q&A at the recent IR Magazine Forum – Small Cap 2020.

Small can mean agile

Picking up the momentum of small caps as the year has gone on, Gervais Williams, head of equities at Premier Miton Investors, commented that many small caps in the UK have outperformed their peers this year.

‘Certain companies within the [small-cap] market have risen quite considerably,’ he said. ‘If there’s a world recession but some small companies could grow when the world isn’t growing, we’ve found many investors have been underweight in many UK small-cap stocks. That’s left them actually fairly flat-footed. Some of these smaller companies have turned out to be more resilient, able to deal with the uncertainties and more agile.’

Williams added that he expects small caps to continue to outperform for a number of years, given their agility in the face of uncertainty.

Rising above the noise

The panelists acknowledged, however, that the act of getting in front of institutional investors can be a challenge for many small and micro-caps, particularly now that we’re living in a virtual environment and requests for meetings are rising sharply.

Heinrich Ey, co-chief investment officer for German and European small and mid-caps at Allianz Global Investors, emphasized that it’s important for IR teams to have a strong database of investors they communicate with regularly and transparently.

‘That’s all you can do on your own,’ he said. ‘Then if you have a good business model you’ve explained well, there’s a chance you will get decent [sell-side] coverage.’

Ey also mentioned that he and his colleagues at Allianz are increasingly managing their own outreach, independent from the sell side. ‘Our team is doing a lot on its own,’ he said. ‘We have more than 1,000 management interactions a year, so there are a lot of opportunities and [IR teams] don’t have to rely on the sell side only.’

For companies that have limited or no sell-side coverage, William Hench, portfolio manager at Royce Investment Partners, suggested that company-sponsored research is a viable alternative. The debate around company-sponsored research, and its potential conflicts, has evolved and softened in recent years, with NIRI proposing guidance for its members earlier this year.

‘I think paid-for research is wonderful,’ Hench said. ‘Most people who are active and in small-cap equities are going to do their own work and make their own decisions anyway, so they don’t need someone to put a rating on the stock to tell them whether it’s any good for them. But it’s helpful to have a different pair of eyes on a stock, and paid-for research is a different set of eyes… So if I were in IR or management, I would welcome it.’

This was one of seven panels at the IR Magazine Forum – Small Cap 2020. Click here for more information about how to access replays from the event.

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