When pawns become Queens: international small companies to lead cyclical recovery
Global small companies outperform their large company counterparts and a quality strategy in international small companies outperforms a market capitalisation investment over the long term, according to a new VanEck white paper.
Sydney, 21 April 2021 – Global small companies outperform their large company counterparts and a quality strategy in international small companies outperforms a market capitalisation investment over the long term, according to a new VanEck white paper.
Since 31 December 2000, international small companies have outperformed international large companies. However, Australian investors have preferred local small companies over international small companies despite the better risk/return profile of the latter, finds VanEck’s white paper, “Finding the international pawns that will become Queens.”
Arian Neiron, VanEck's CEO and Managing Director - Asia Pacific, said: “Many investors seek growth opportunities by investing in small companies in the S&P/ASX Small Ordinaries. But this is a very small pool, heavily dominated by miners and speculative companies. The international opportunity is 20 times bigger with approximately 4,000 listed international small companies making up the benchmark, MSCI World ex Australia Small Cap Index.
“However, like Australian small caps, not all of these companies are desirable from an investment perspective. Investors would potentially reap greater benefits by focusing on quality companies,” said Neiron.
VanEck’s research finds that quality investing, which has displayed historical outperformance in both large- and mid-cap companies, also displays historical outperformance in international small companies.
“The Quality factor has been shown to generate higher alpha in small companies than in large companies. It’s important to remember too, that every large-cap ‘Queen’ was once a pawn who reached the eighth rank. At the start of any chess game any pawn has the potential to become a Queen,” the white paper says.
Where Australians do invest internationally, often their exposure to equities is dominated by large- and mid-cap companies.
“This is because the benchmark index used by Australian managers is the MSCI World ex Australia Index, which aims to capture the performance of these large- and mid-cap companies. This benchmark captures approximately 85% of the free float-adjusted market capitalisation of each developed country in the index, so it includes the largest companies in each country until this threshold is reached,” the white paper finds.
“As a result investors are missing out on opportunities in the remaining 15% of the international market not included in the benchmark. These companies are considered international small-cap companies.”
VanEck has recently launched the VanEck Vectors MSCI International Small Companies Quality ETF (ASX:QSML).
“Australians can now invest in 150 quality small companies identified by MSCI in a single trade on ASX. QSML opens up the diverse small cap world to local investors in one low-cost trade,” said Neiron.
“The ETF tracks the MSCI World ex Australia Small Cap Quality 150 Index, which consists only of small-cap companies with fundamentals that satisfy key principles of quality investing advocated by investment greats Benjamin Graham and Warren Buffett, namely: high return on equity; stable earnings growth; and low financial leverage,” Neiron said.
VanEck is one of the world’s largest issuers of ETFs (Exchange Traded Funds), managing in excess of $70 billion globally for individual and institutional investors. Founded in New York in 1955, VanEck is a pioneer in international investing and in gold funds, launching the first gold equities fund and the first gold ETF in the US.
In Australia, we have 28 ETFs on ASX that focus on delivering superior performance through beyond-the-usual approaches and providing access to asset classes typically unavailable to Australian investors.
General information only
VanEck Investments Limited ACN 146 596 116 AFSL 416755 (‘VanEck’) is the responsible entity and issuer of units in VanEck Vectors MSCI International Small Companies Quality ETF (ASX: QSML). This is general advice only, not personal financial advice. Read the PDS and speak with a financial adviser to determine if the fund is appropriate for your circumstances. The PDS is available at www.vaneck.com.au. An investment in QSML has risks, including possible loss of capital invested. QSML carries risks associated with: financial markets generally, individual company management, industry sectors, ASX trading time differences, foreign currency, country or sector concentration, political, regulatory and tax risks, fund operations and tracking an index. See the PDS for details. No member of the VanEck group guarantees the repayment of capital, the payment of income, performance, or any particular rate of return from the fund. No member of the VanEck group of companies guarantees the repayment of capital, the payment of income, performance, or any particular rate of return from any fund.
QSML is indexed to a MSCI index. QSML is not sponsored, endorsed or promoted by MSCI, and MSCI bears no liability with respect to QSML or the MSCI World ex Australia Small Cap Quality 150 Index. The PDS contains a more detailed description of the limited relationship MSCI has with VanEck and QSML.