Small and medium caps make up about 70% of the job market worldwide, according to the International Labour Organization1 . Founders, managers and employees create wealth for our regions, making a positive contribution to the boom in the real economy.
AN ASSET CLASS IN TUNE WITH THE ENTREPRENEURIAL WORLD
A number of differences separate small caps – true niche operators, in which we find tomorrow’s leaders – from large caps. Many small caps are still managed or majority held by their founder or the founding family. Entrepreneurs can speed up their growth on the stock market while retaining control. With such stable shareholding, a strategic vision that drives growth while protecting capital can endure over time. As a bonus, operating and market performance is often superior, boosted by far greater agility and responsiveness than large corporations have. Notably, European small caps show greater growth potential than large caps, for similar debt levels and lower volatility.
SUPPORTING ENTREPRENEURS OVER THE LONG TERM
Aligning interests in this way can also be a winning formula for minority shareholders, even if, conversely, management that dominates – or, indeed, is seen as ‘being’ the company – may be viewed negatively, especially if bad strategic choices are made. That’s why it is crucial to perform an in-depth analysis of the management team’s strategy, and assess the company’s track record and governance policies before investing in it. The goal is to choose companies that can generate lasting, profitable growth, and also find managers who can pair a long-term strategic vision with effective operations in the short term.
This management quality criterion is fundamental, and equally fundamental is a small caps fund manager who goes into the field each year to meet with the companies they are watching. That way, the fund manager has a clear picture of the company’s growth and can support entrepreneurs over the long term.
COMMITTING TO OUR ECONOMIES
The megatrends at work in our economies – social, demographic, technological and environmental – and their increasing speed over the past few years are drawing us even more towards small caps. They’re ideally positioned on booming underlying markets: the digitalization of the economy, the energy transition and the changing habits of consumers. Innovation really is in their DNA. Neither start-ups nor mature companies, small caps are most often in phases of development that combine growth, innovation and profitability.
GIVING YOUR INVESTMENT MEANING – FOR JOB GROWTH
Investing in small caps is another way to diversify your asset allocation while at the same time giving your investment meaning. You’re supporting dynamic companies with a strong corporate culture, most often a high employee approval rating, and a positive impact on their natural job pool.
Supporting these job-creating, talented entrepreneurs is a meaningful project for Edmond de Rothschild: beyond the traditional ESG criteria, this is a way to signpost your investments in companies that are helping their regions grow over the long term.
1 Study published in October 2019..
Article written by Caroline Gauthier, fund manager european equities – small & mid caps, co-head of equity management and Benjamin Rousseau, fund manager european equities – small & mid caps.
WARNING
May 2023. This document is issued by the Edmond de Rothschild Group. It has no contractual value and is designed for information purposes only.
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