Investors can add global growth exposure through ASX-listed small caps
Originally published on Australian Financial Review on 6 June 2017
[Adapted from The Australian Financial Review]
Activus Investment Advisors management director Robert Talevski highlighted the opportunities that exist in small cap valuations, after several years of large cap outperformance. But he cautioned on the sentiment-driven nature of returns from small caps, which frequently lack the diversification and hedging present in larger companies.
"The relative outperformance of large caps over small caps has brought about a valuation differential between the two," he said. "Large caps with a price-to-earnings ratio 18.3 times are considered expensive relative to its long-term average and in comparison to small caps with a price-to-earnings ratio of 16.1.
"But both large and small caps are stretched compared to long-term averages in an absolute sense. And small caps tend to get impacted by sentiment, which isn't always easy to measure."
Because of this, he said, investors needed to look at small caps with long-term exposure in mind. "Being a long-term investor also helps allowing smaller companies to achieve their growth expectations over the long term without being impacted by short-term fluctuations."
"At a minimum, you should be looking anywhere from three to five years."