HEAD-TO-HEAD: Manulife vs Templeton

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Pictured: Germaine Share, senior analyst, Morningstar

Small cap equities have outperformed large caps over the last 16 years, according to Standard Life’s Andrew Paisley (http://www.fundselectorasia.com/news/1037452/-risk-reward-european-cap-investing). He argues that despite short-term volatility, small-cap funds offer better risk-adjusted returns than their large-cap counterparts.

Managers of small cap funds benefit from the general scarcity of research on smaller companies, resulting in mispricing, which diligent stock pickers can exploit.

From a regional viewpoint, the fortunes of Asian small companies sector have varied over the past few years. So far in 2017, the MSCI AC Asia ex-Japan Small Cap Index has outperformed its global small cap counterpart and the MSCI AC World Index.

This was not the case in 2015 and 2016. Last year was bad for Asian small caps, which severely underperformed the world small cap index.

Small caps also carry specific risks. Liquidity may be a problem because they typically are not widely held. Depending on the sector, they can be very risky. Growth of a biotech small cap, for example, could be unexpectedly limited by government regulation or by new product research that didn’t work out as expected. Currency movements also tend to have a stronger impact on small caps that export than their large cap counterparts.

Moreover, a small cap company tends to be too focused on re-investing in growth to pay dividends.

FSA talks to Germaine Share, senior analyst for manager research at Morningstar, who compares two Asian small cap funds registered for sale in Hong Kong or Singapore: the Manulife GF Asian Small Cap Equity Fund and the Templeton Asian Smaller Companies Fund.

Data: Morningstar, FE

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