Big mid small caps
Since 1996, small- and mid-cap companies have generated between 1.21%-2.40% of alpha over t he l a r ge- c ap s t ocks ( FTSE/ JSE Top 40 Index), and the power of compounding this alpha over 17 years is astounding. This makes this area of the market hugely important for the investment of long-term assets. In fact, many well-respected investors have established their reputations in this area of the market.
Not only is this alpha generation true in South Africa, but it also applies to international markets. I have seen studies out of the UK and the US where the alpha generation out of the mid- and small-cap areas over the last 100 years has been in the region of 1.5% to 2.5% of excess returns over large caps per annum. ride. Capitec and Mr Price have both been hugely rewarding for shareholders over long periods of time. In the survival stage the business is a workable business entity that now needs to generate enough cash to enable it to break even.
Now the business is doing well and it is then the right time to expand and grow.
In this stage of take-off the decisions revolve around growth and how the business funds that growth.
Here the company needs to consolidate and control the f inancial gains brought about by growth. Businesses in this stage now have the advantages of size, management, systems and f inancial resources to be a continuing success.
The key to mid- and small-cap investing is to invest in these businesses early, before the rapid earnings growth and before the market has rerated the business as a result of these superior earnings numbers. Warren Jervis is portfolio manager of the Ol d Mut u a l S mal l