20 Feb Fund Manager Focus – BlackRock Gbl Sm Caps Fd WS (H)
Our Fund Manager Focus Newsletters focus on a fund manager within our investment portfolio and provide information to help our clients understand their investment philosophy and outcomes.
This newsletter focuses on The BlackRock Global Small Caps Fund WS (Hedged).
Introduction
The market capitalisation of a company is essentially the value of a company at the current share price. Globally there are over 10,000 listed companies of various sizes. For the purposes of establishing relevant indices, listed companies are broadly divided into large and small companies by capitalisation (cap). For instance, within Australia the All Ordinaries index comprises over 500 shares. The top 100 companies by market capitalisation are considered ‘large cap’ and the remainder ‘small cap’. The dividing line is arbitrary and the producers of indices regularly review an index to include or omit a company from a particular index as their value changes. BHP is the largest company on the Australian market with a market value (cap) of $183 billion and ranks number 37 in global terms. Currently the companies at the bottom of the top 100 will have a value of around $1.9 billion. This varies to some extent with market movements.
Globally, large cap companies that are listed and have a minimum ‘free-float’ of shares, number about 1,500. This is the universe from which most global share fund managers will generally build a portfolio. Consequently companies outside of this universe are automatically excluded from portfolios and receive only modest attention from investment analysts. Adjusting for minimum size and liquidity benchmarks, the MSCI Global Small Cap Index includes around 6,400 companies.
Over the longer term small companies can grow in to large companies as their businesses grow. For example at the last re-weighting of the ASX/S&P 100 index in December, Flight Centre and Carsales.com were included at the expense of Paladin Energy and Seven West Media (large companies can also revert to small companies in certain circumstances).
We believe there is merit in including an allocation to global small caps to provide exposure to smaller companies with greater growth prospects. Successful smaller companies that can be identified at an early stage can provide a portfolio with significant growth opportunities. However as you would expect, the prospect for higher growth is accompanied by higher risk. The failure rate of smaller companies is generally higher than large companies. Moreover, smaller companies also display significantly greater price volatility during market disruptions. It is for these reasons that we generally only recommend an exposure to this sub-sector in portfolios where clients have a higher tolerance for capital volatility.
About the Manager
Blackrock is one of the largest investment management firms in the world. The ‘Global Small Caps’ team is based in Philadelphia & Boston, and led by Tom Callan. Tom has over 22 years’ experience in portfolio management, and has been with Blackrock since 1998. He is supported by a staff of 15 investment professionals including 11 stock analysts.
Investment Philosophy
The manager seeks to build a globally diversified portfolio of quality small and mid-sized listed companies. The manager researches over 100 industry sub-sectors to assess the relative attractiveness of these sectors on a global basis. From this point, stocks within sectors considered attractive are assessed on a fundamental basis. The manager attempts to identify companies that are undervalued by the market and operate in industries with long term growth potential. The portfolio will generally hold between 125 – 175 stocks. This is designed to provide broad diversification within this subsector. The average capitalization of companies in the portfolio tends to be between US$1 – 2 billion.
Since inception the fund has produced an annualised return after fees of 6.42% p.a., compared to the relevant index return of 1.44% p.a. over the same time period.
The following table illustrates the performance of the fund to 31 December 2012 (after fund manager fees):
The fund does not benchmark its geographic exposures. These arise as a derivative of the sector and stock analysis used to create the portfolio. As you would expect, the stocks held in the portfolio are unlikely to be familiar household names in Australia. Nevertheless many of the companies held have global operations belying their relative size. Moreover, a number of the companies held operate in industries you may not be familiar with i.e. Subsea 7 is a Norwegian company that provides ‘sea-bed to surface’ engineering and construction services to resource companies. SBA Communications builds, owns and operates wireless communications infrastructure (towers etc) throughout the Americas. While both companies are relatively small on a global scale, both have a market capitalisation near US$9 billion (about the same size by market cap as Orica or Transurban on the Australian Stock Exchange).
The following table indicates the current top 10 holdings of the fund. These represent a total of 12.7% of the portfolio:
While the fund has a good long term record when compared to the relevant benchmark, shorter term returns (1 – 3 years) have lagged the relevant benchmark. This is in large part due to the manager’s cautious approach during this period. While global equity markets are being driven more by liquidity than fundamentals, we would expect the manager to continue to underperform the index. This reflects the manager’s bias towards assessing the fundamental quality of a company’s growth prospects over the longer term. We would expect this approach to provide more sustainable long term returns in a sector that is inherently sensitive to changes in economic conditions.
We believe the fund blends well with other Global Equity funds by providing access to investment opportunities outside the scope of large cap managers.
For further information regarding this or any other investment, please contact this office.