Six in 10 fund buyers plan to increase their exposure to small cap companies this year, according to a poll by AXA IM. This is up from just 33% a year ago. There are two factors driving the interest in small caps: a recent jump in M&A activity and a strong macroeconomic backdrop.
“Small cap companies tend to be beneficiaries of mergers & acquisitions, and the first quarter of this year has seen M&A activity jump 12% from the previous quarter,” said Mattthew Lovatt, head of sales at AXA IM, adding: “We believe that a higher allocation to this asset class could be beneficial particularly in the current global macroeconomic environment.”
The majority of the survey respondents allocate only 6-10% of their equity portfolios to small caps, but they are set to increase this share as the global economy is picking up. “A higher allocation to this asset class could be beneficial particularly in the current global macroeconomic environment,” said Lovatt.
Tanja Wennonen-Kärnä, senior portfolio manager at Evli Bank in Helsinki, is one of these investors looking favourably towards the small cap space at the moment.
“If you look at current macro figures, investors are in a good mood, probably the best we have seen since the financial crisis,” she told Expert Investor. Emerging markets is the asset class where Wennonen-Kärnä sees the best opportunities for small caps.
And Evli has a double overweight: “We have a 20% exposure to emerging market equities, and within that we have allocated 40% to small caps. Smaller companies simply grow faster than large caps,” says Wennonen-Kärnä. And that’s especially the case when the economic backdrop is benign of course.
When we asked the crowd at the recent Expert Investor Finland forum in Helsinki if they preferred large caps or small caps, smaller companies were the clear favourite in European equities, and were also favoured in emerging markets.