Big mid small caps

Finweek English Edition - - COMPANIES & INVESTMENTS -

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.

STAGE 3:

Now the busi­ness is do­ing well and it is then the right time to ex­pand and grow.

STAGE 4:

In this stage of take-off the de­ci­sions re­volve around growth and how the busi­ness funds that growth.

STAGE 5:

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

Com­pa­nies Fund.

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