Why Global Small Caps?
Why Global Small Caps?Download Article as PDF
Blue Orbit Asset Management is a boutique investment manager, focused on systematic equity investing in inefficient markets, such as Australian Small Caps and Global Small Caps. These market segments offer significant opportunity for a robust systematic process to capture significant alpha.
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Why Global Small Caps?
- Global small caps has a better beta. Recent MSCI research (reproduced in Figure 1) clearly demonstrates that over the last 15 years MSCI World Small Caps has provided better risk adjusted returns than MSCI World, MSCI Emerging Markets, or MSCI Emerging Markets Small Caps.
- Significantly better alpha opportunity. Naïve multi-factor strategies can potentially achieve 1% p.a. excess returns over long periods, whereas in small caps this increases to 2-3% p.a. excess return. Sophisticated alpha strategies in global small caps can harvest additional alpha over and above this, and aim for at least 4% p.a. excess returns over rolling five year periods.
- Well-diversified index. Currently, the 5 largest stocks in the large cap MSCI World Index sum to 12.5%, whereas in MSCI World Small Caps the top 5 names sum to only 1.0%. Looking for alpha in the small caps index does not start with a decision about the mega cap FAANGS. Small Cap country and sector distributions are slightly more diversified than large caps, and the universe (4000+ stocks) is a large opportunity set.
- Simple risk profile. Geo-political risk, market risk and currency risk for the MSCI World Small Caps index is effectively the same as for the large cap MSCI World.
- Surprisingly high liquidity. The size of companies in MSCI World Small Caps roughly translates to around stocks 75-150 in the ASX. This provides nearly double the capacity of an ASX SMID alpha strategy, or five to six times the capacity of an ASX small caps alpha strategy.
Global Small caps can offer a better, more diversified beta, with a better alpha opportunity. How does your allocation to global small caps compare to global large caps?
To receive a more detailed overview on our Global Small Caps methodology and approach, please click here.
Director, Head of Distribution
Disclaimer and Disclosure
Blue Orbit Asset Management (Blue Orbit) (AFSL 513710) is the manager for the Blue Orbit Asset Management Global Small Cap Systematic Alpha Fund. The material contained in this communication (and all its attachments) is general information only and has been prepared by Blue Orbit. It is not intended to take the place of professional advice and you should not act on any recommendation (if any) made in this communication without first consulting your investment advisor in order to ascertain whether the recommendation (if any) is appropriate, having regard to your investment objectives, financial situation and particular needs. Nothing in this communication shall be construed as a solicitation to buy or sell a security or to engage in or refrain from engaging in any transaction. Blue Orbit believe that the information and advice (if any) contained herein is correct at the time of compilation. However, Blue Orbit provide no representation or warranty that it is accurate, complete, reliable or up to date, nor Blue Orbit accept any obligation to correct or update the opinions (if any) in it. The opinions (if any) expressed are subject to change without notice. Blue Orbit do not accept any liability whatsoever for any direct, indirect, consequential or other loss arising from any use of the material contained in this communication. This communication may refer to the past performance of a person, entity or financial product. Past performance is not a reliable indicator of future performance. Investors should obtain the relevant product disclosure statement and consider it before making any decision to invest.