Investment

Chart of the month: January Edition

by Angel Sanz

US EQUITIES: “SMALL IS BEAUTIFUL” (SOMETIMES)

Source: Bloomberg, IBES, Notz Stucki
Source: Bloomberg, IBES, Notz Stucki

 

In 1973, the British economist E. F. Schumacher published the book “Small is beautiful”. Although he did not talk about mid-small caps, the sentence is widely used to champion small players in all kinds of businesses. French & Fama published in the 80s the famous study that showed that, historically, small-mid caps had outperformed the SP500, which is called the “small firm effect”.

The lower panel shows the relative performance of the SP400 mid-caps versus the SP500 large-caps. During the last 6 years, mid-caps have outperformed large caps but not consistently, and so there are periods where large caps outperformed also. So what can we expect today and why?

The upper panel shows the relative PE 12month forward of mid-caps vs large-caps. The graph displays the ratio during the last 6 years with +/-1 and +/-2 standard deviations. Even though it is only a rough trading rule, we can see that when the relative valuation is one standard deviation cheap (blue arrows), historically mid-caps have outperformed large-caps (lower panel). From the valuation standpoint we are in a good situation to overweight the mid-caps in the US equity market.

From the fundamental point of view there are other good reasons to expect outperformance in the mid-cap universe also:

  1. Consensus earnings growth for SP400 mid-caps is 13.3% and 15.5% respectively for 2016 and 2017, whereas the consensus for the SP500 is 12.8% and 10.4% (IBES). Please, do not believe the absolute numbers, as analysts typically miss the growth by 6.5%, but the relative growth is what matters.
  2. The major victims of the strength of the USD are large caps which get a much higher proportion of their profits from overseas, so mid-caps will be more protected in this strong USD environment.

Both indexes have important differences in terms of sector composition as can be seen in the table below. This composition confirms that mid-caps are more exposed to the domestic market.

Total 100% 100%
Sector Exposure 30-nov.2015 SP 500 SP 400
Information Technology 21% 16%
Financials 17% 27%
Health Care 14% 9%
Consumer Discretionary 13% 13%
Industrials 10% 15%
Consumer Staples 10% 4%
Energy 7% 4%
Materials 3% 7%
Utilities 3% 5%
Telecom. Services 2% 0%

Source: Vanguard

Conclusion

In a low return environment, it is important to be able to profit from relative trading opportunities. With valuations relatively more attractive and better fundamentals, US mid-caps might be a better place than large caps.

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Antonio Mira
CHIEF FINANCIAL OFFICER, MEMBER OF THE EXECUTIVE COMMITTEE

Antonio Mira joined NS Partners in 2006 as Group Chief Financial Officer. He heads the corporate functions and is involved in coordinating and implementing the decisions of the Executive Committee.
An experienced bank auditor, Antonio started his career in 1995 with Arthur Andersen, where he worked for some 7 years before joining Ernst & Young in 2002 as a Senior Manager.
Antonio is a Swiss chartered accountant and a Business graduate of Lausanne University (HEC).

Sébastien Poiret
DEPUTY HEAD OF WEALTH MANAGEMENT

Sébastien Poiret joined NS Partners in 2008 and manages funds of hedge funds and private client mandates. He also oversees the development of the Group’s offices in Mauritius.

Prior to joining NS Partners, he served as a Trader, Head of Manager research and Portfolio Manager in the USA and Switzerland for a single hedge fund (1998-2004) and for Optimal (2004-2008), Grupo Santander’s fund-of-hedge funds operations.

Sébastien holds a Bachelor’s degree in Corporate Finance from the ESPEME Business School (EDHEC Group) and an MBA in Finance and Economics from the Institute of Business Administration, both in Nice.

Abir Oreibi
BOARD DIRECTOR

Abir Oreibi joined the Board of the NS Partners Group in 2018, where she brings her truly international perspective and rich experience.
Among many other ventures, Abir set up Alibaba.com’s first European office. After living and working in Shanghai, Hong Kong, Bangkok and London, she now lives in Geneva, where she is CEO of Lift Events, an organization that identifies technology trends, their business and social impact through the organization of events and open innovation programs. Issues related to the challenges and opportunities created by new technologies as well as the strategic responses from organizations are at the heart of Lift’s activities.
Abir holds a BA in Political Sciences from the University of Geneva. She is an investor, and member of advisory and innovation boards.

Romain Pidoux, CAIA

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Romain Pidoux joined NS Partners in 2011 and heads the Group’s Risk Management.
He started his financial career in 2005 as Head of Quantitative Analysis for a Swiss Family Office, selecting funds and managing portfolio allocation. In 2008, he switched to the alternative world and joined Peak Partners as hedge funds analyst.
He is a Chartered Alternative Investment Analyst (CAIA) and holds a Master’s degree in international relations from the Graduate Institute of International Studies at Geneva University.

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