Spotting Big Winners in Global Small-Caps
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25 November 2020
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The small-cap space has been one of the biggest winners year-to-date, as prospects of an economic revival becomes clearer. In our latest Fundamental Flash, we speak with Ben Sheehan, Senior Investment Specialist, Equities of Aberdeen Standard Investments to discuss opportunities in global small-caps and the outlook ahead.

1. Why should we invest into the global small-cap strategy and why now?

Small-caps offer a huge and untapped universe of over 6000 stocks. It is also a segment of the market that you can find tomorrow’s leaders today. By just focusing on large-cap stocks, you are ignoring about two-thirds of the stock universe.

In addition, small-caps are very inefficient and an under researched segment of the market which makes our job of finding great companies ahead of the pack so much easier.

There is data going back over 90 years that shows small-caps have outperformed large-caps by a big margin. This has happened over a very long time. There is now a generational opportunity to invest in small caps relatively cheaply. So this is not just a great asset class, it is also a great time to get set and build position ahead.

2. What has done well or not so well for the strategy this year? 

The Global Quantum Fund has been performing well during the recovery phase since the market hit rock bottom on March 23 2020. Since then, the fund is up almost 80% and has outperformed the MSCI AC World Small-Cap index by 5%. It’s also 20% higher than the MSCI ACWI index which is a large-cap index.

We attribute this strong performance to the quality of the companies we invest in. Quality to us means a strong balance sheet, clear competitive advantage, high margins and the strength of management. Importantly, we choose companies operating in growth industries.

With the market having a laser focus on fundamentals right now, this has been a very good environment for our investment approach.

3. Were there any changes to the portfolio positioning as well as key portfolio action?

We have a bias towards innovative companies. Our sector exposure indicate our heavier weight in technology, healthcare, industrials and consumer sectors. On the flipside, we tend to hold less in low growth sectors such as telecom and utilities. We also hold very little in the more volatile energy and materials sectors. These are long-term sector preferences that have continued to serve us well in 2020.

In terms of recent activity, we have added to our consumer-related exposures including a UK homewares retailer and a supermarket operator in Finland. Given global spending habits during COVID-19 have shifted away from services (e.g. travel and experiences) and towards goods (e.g. foods and home upgrades), these type of additions will help ensure earnings certainty in the portfolio.

We have also added a Korean company that specializes in cloud-based accounting software. Given Korea has emerged from COVID-19 in relatively good shape, we expect IT services spending there to remain robust.

To fund these purchases, we have exited travel related names that will fundamentally face headwinds going forward. 

4. Where are you finding investment opportunities in this current market?

Through our bottom-up research process we have uncovered various structural growth opportunities. These include plays as diverse as 5G, diabetes treatment, content moderation, green energy, cashless payments and home healthcare.

Many of these are unique opportunities that you can only find in the small cap space. These are effectively going to give you exposure to big structural spending shifts such as those caused by COVID-19, demographic changes like ageing, growing health issues like obesity, a move to a more cashless society, or even global policy makers who are now committing to a greener and lower carbon world. The Global Quantum Fund provides investors exposure to these multi-year structural growth stories.

5. Do you foresee any headwinds for this strategy going forward?

Volatility will remain a feature of equity markets and there are various potential triggers for this volatility. This includes continued frostiness in US-China relations, further waves of COVID-19 and related risks to global growth. We also face a possibility of a no agreement over Brexit.

But offsetting this on the positive side, there is abundance of policy support both monetary and fiscal. We also have some promising data on COVID-19 vaccine trials. Businesses and economies are also now adapting better to a COVID-19 world. Closer to home in Asia, we have also seen the RCEP trade agreement sealed recently between various Asia Pacific nations.

Otherwise, there appears to be an emerging bullish consensus that 2021 will be a recovery year for economies and markets. We all want to leave 2020 and not look back. With regards to volatility that we foresee, we will use it an opportunity to exploit mispricing opportunities.

6. Any words of advice to investors looking to deploy into small-caps?

Despite the recent strong market performance, small-caps remain much cheaper versus large caps than at any time in the last 17 years. This represents a good entry point to get set for the long term. In fact, a generational opportunity.

On top of that, by partnering with us, you are investing in a manager that knows this space well and has generated top decile performance with a consistent process. We are an old hand at this and have gone through many economic cycles. The opportunity is now, where you can identify tomorrow’s winners today.

Disclaimer
This article has been prepared by Affin Hwang Asset Management Berhad (hereinafter referred to as “Affin Hwang AM”) specific for its use, a specific target audience, and for discussion purposes only. All information contained within this presentation belongs to Affin Hwang AM and may not be copied, distributed or otherwise disseminated in whole or in part without written consent of Affin Hwang AM.

The information contained in this presentation may include, but is not limited to opinions, analysis, forecasts, projections and expectations (collectively referred to as “Opinions”). Such information has been obtained from various sources including those in the public domain, are merely expressions of belief. Although this presentation has been prepared on the basis of information and/or Opinions that are believed to be correct at the time the presentation was prepared, Affin Hwang AM makes no expressed or implied warranty as to the accuracy and completeness of any such information and/or Opinions.

As with any forms of financial products, the financial product mentioned herein (if any) carries with it various risks. Although attempts have been made to disclose all possible risks involved, the financial product may still be subject to inherent risk that may arise beyond our reasonable contemplation. The financial product may be wholly unsuited for you, if you are adverse to the risk arising out of and/or in connection with the financial product.

Affin Hwang AM is not acting as an advisor or agent to any person to whom this presentation is directed. Such persons must make their own independent assessments of the contents of this presentation, should not treat such content as advice relating to legal, accounting, taxation or investment matters and should consult their own advisers.

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Neither Affin Hwang AM nor any of its directors, employees or representatives are to have any liability (including liability to any person by reason of negligence or negligent misstatement) from any statement, opinion, information or matter (expressed or implied) arising out of, contained in or derived from or any omission from this presentation, except liability under statute that cannot be excluded.


Warning Statement
A copy of the Information Memorandum and Product Highlights Sheet ("PHS") can be obtained at Affin Hwang Asset Management's sales offices or at www.affinhwangam.com. Investors are advised to read and understand the contents Affin Hwang World Series - Global Quantum Fund’s Information Memorandum 18 April 2018 and the corresponding PHS before investing. There are fees and charges involved when investing in the fund stated herein. Investors are advised to consider and compare the fees and charges as well of the risks carefully before investing. Investors should make their own assessment of the risks involved in investing and should seek professional advice, where necessary. The price of units and distribution payable, if any, may go down as well as up and past performance of the fund should not be taken as indicative of its future performance. The Securities Commission Malaysia has not reviewed this marketing/promotional material and takes no responsibilities for the contents of this marketing/promotional material and expressly disclaims all liability, however arising from this marketing/promotional material.
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TENG CHEE WAI

Managing Director
Teng Chee Wai is the founder of Affin Hwang Asset Management Berhad (Affin Hwang AM). Over the past decade, he has built the Company to be the fastest growing and only independent investment management house in Malaysia’s top three, with an excess of RM47 billion in assets under management as at 31 December 2018.​

​In his capacity as Managing Director / Executive Director, Teng manages the overall business and strategic direction as well as the management of the investment team. His hands-on approach sees him actively involved in investments, product development and marketing. Teng’s critical leadership and regular participation in reviewing and assessing strategies and performance has been pivotal in allowing the Company to successfully navigate the economically turbulent decade.

Teng’s investment management experience spans more than 20 years, and his key area of expertise is in managing absolute return mandates for insurance assets and investment-linked funds in both Singapore and Malaysia. Prior to his current appointments, he was the Assistant General Manager (Investment) of Overseas Assurance Corporation (OAC) and was responsible for the investment function of the Group Overseas Assurance Corporation Ltd.​

​Teng began his career in the financial industry as an Investment Manager with NTUC Income, Singapore. He is a Bachelor of Science graduate from the National University of Singapore and has a Post-Graduate Diploma in Actuarial Studies from City University in London.
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