Download Looking to gain from small-cap inefficiencies with active management

For professional investors and financial advisers only – not for use by retail investors
Looking to gain from small-cap
inefficiencies with active management
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Seeking more from small caps with active management
Unlike large-cap companies, small-cap stocks have fewer Wall Street
analysts dedicated to researching them. There were an average of 24
analysts dedicated to researching a large-cap company and 13 analysts
dedicated to a mid-cap company.A Small-cap companies had an
average of seven analysts.
The high coverage large caps receive means these companies are priced
by the market. And with such extensive research externally available
on these stocks, there leaves little room to capture opportunities in
mispriced stocks.
This is the reverse case for small caps. The small-cap universe is one
corner of the market where there are abundant opportunities to exploit
market inefficiencies through fundamental analysis and stock picking.
But powerful stock picking requires significant active management.
Especially when it comes to small-caps (where the needed research
may not be available), active management is the key ingredient to
capitalising on market inefficiencies.
Why active?
Often, when investors are buying into passive index and exchangetraded funds (ETFs), they are buying the package deal without needing
or wanting everything in the set. Active management can help reduce
this blind buying by being more selective with small cap companies.
Also, because active managers are not limited to just the investments
within the index, they are open to capturing more opportunities than
what looks available to the rest of the market.
Wall Street analysts per stock, on average
23 Large cap
17 Mid cap
Why Small Caps Now?
Average z-score (1978-2015)
3
2
1
0
-1
-2
-3
78 80
85
90
85
As noted above, there aren’t nearly as many analysts to do the lifting
on researching small-cap companies (concurrently making sure they
make suitable investments that can add value). While this leaves smallcap managers like us to have to do more heavy work, we view this as
an advantage because of the abundant opportunities there are to find
inefficiencies within the small-cap market and capitalise on them.
Our entire firm is driven by first-hand research, so we already possessed
the tools needed to carry out this kind of needed fundamental research
for small caps.
10
15
Source: BofA Merrill Lynch Small Cap Research; Russell Investment Group, September 2015. For illustrative
purposes only. Z-score is a statistical measurement of a data point’s relationship to the mean; a negative
z-score is below, 0 is the same as, and positive is above the mean. The average z-score was taken and
percentiled and then further quintiled to create certain buckets. When the average z-score fell into quintile
1, small caps (Russell 2000) were cheap relative to large caps (Russell 1000). When the average z-score fell
into quintile 5, small caps were relatively expensive.
Acting on active management
Getting the most out of the small-cap universe may be easier said
than done. Capitalising on small-cap efficiencies and the dynamics
that exist in today’s investment environment requires a substantial
amount of resources.
Active share measures how active a fund is compared to its benchmark.
It looks at the aggregate differences in portfolio holding weights
compared to the benchmark constituent weights. This percentage
score, attributed to its founders Martijn Cremers and Antti Petajisto,
reveals the extent to which your manager is using active management
for your investments.
This can make a significant difference in the small cap asset class,
where locating opportunities requires a more hands-on approach.
A vehicle with an active share of 0 would hold exactly the same
portfolio as the benchmark index, while a vehicle with an active share
of 100 would have no holdings in common with the benchmark.
Aberdeen Global - North American Smaller Companies FundB
Active Share:
95.9%
Source: Aberdeen Asset Management, as at 31 August 2016.
As of February 29 2016, the Aberdeen Small Cap Fund changed its name to the Aberdeen Global North American Smaller Companies Fund.
Bloomberg, February 2016.
B
05
Are you getting the most from your active managers?
7 Small cap
Source: Bloomberg, 2016. For illustrative purposes only.
A
00
Expensive (top quintile z-scores (above 0.74)
Cheap (bottom quintile z-scores (below -0.64)
Talking about Aberdeen Global - North American Smaller Companies Fund with your clients
Our North American Smaller Companies Fund has a portfolio team of 13 investment professionals who do all their own on-the-ground research
to pick stocks from the bottom-up. We carry out our own due diligence and never invest in a company without meeting management face-to-face.
This is critical when buying small-cap stocks because we have to do more of our legwork given the lack of information available externally.
Aberdeen Global - North American Smaller Companies Fund – Fund Facts
BenchmarkC
Minimum Initial Investment
Ongoing Charges Figure (OCF)
D
Class A
Institutional Class
Russell 2000
Russell 2000
$1,500
$1,000,000
1.75%
0.96%
The fund returns to the reporting date are based on dealing NAVs using a 13:00 CET valuation point: for US Equity Funds this means the dealing NAV uses security prices at close of the previous working day. The benchmark
index, if unadjusted, would use the closing prices of the reporting date: when a US Equity benchmark is compared against a US equity fund this valuation point difference may produce a significant distortion in benchmark-relative
performance. In order to neutralise this distortion, the benchmark returns shown are to the day previous to the reporting date.
D
The Ongoing Charge Figure (OCF), is the overall cost shown as a percentage of the value of the assets of the Funds. It is made up of the Annual Management Charge (AMC) of 1.50% and other charges. It does not include any initial
charges or the cost of buying and selling stocks for the Funds.
The Ongoing Charges figure can help you compare the annual operating expenses of different Funds.
C
The value of investments and the income from them can go down as well as up and your clients may get back less than the amount invested
Important information
PLEASE CONSIDER THE RISKS
Risk factors you should consider before investing:
• The value of shares and the income from them can go down as well as up and you may get back less than the amount invested.
• Investing globally can bring additional returns and diversify risk. However, currency exchange rate fluctuations may have a positive or negative impact on the value of
your investment.
• Shares of smaller companies may be more difficult to buy and sell than those of larger companies. This means that the Investment Manager may not be able to buy and sell
at the best time or may suffer losses. This could reduce your returns.
• The Sub-Fund’s exposure to a single country market, which may be subject to particular political and economic risks, may cause the sub-fund to be more volatile than more
broadly diversified funds.
For professional investors and financial advisers only – not for use by retail investors
Further information
For more information please contact your local Aberdeen representative, or visit our website at aberdeen-asset.com
The Fund is a Luxembourg-domiciled UCITS fund, incorporated as a Société Anonyme and organised as a Société d’investissement à Capital Variable (a “SICAV”).
The information contained in this marketing document should not be considered as an offer, or solicitation, to deal in the shares of any securities or financial instruments.
It is not intended for distribution or use by any person or entity who is a citizen or resident of or located in any jurisdiction where such distribution, publication or use would
be prohibited. The Fund is not registered under the United States Securities Act of 1933, nor the United States Investment Company Act of 1940 and therefore may not
directly or indirectly be offered or sold in the United States of America or any of its states, territories, possessions or other areas subject to its jurisdiction or to or for the
benefit of a United States Person. No information, opinions or data in this document constitute investment, legal, tax or other advice and are not to be relied upon in making
an investment or other decision. Subscriptions for shares in the Fund may only be made on the basis of the latest prospectus, relevant Key Investor Information Document
(KIID) and Supplementary Information Document (SID). These can be obtained free of charge from Aberdeen Asset Managers Limited, 10 Queens Terrace, Aberdeen, AB10 1YG,
Scotland and are also available on aberdeen-asset.com. Tax treatment depends on the individual circumstances of each investor and may be subject to change in the future.
You should obtain specific professional advice before making any investment decision. Issued by Aberdeen Asset Managers Limited which is authorised and regulated by the
Financial Conduct Authority in the United Kingdom.
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