Please find below our summary of a brilliant series of video presented by Rajeev Thakkar – CIO of one of the best mutual funds in the industry – PPFAS Mutual Fund. To watch the entire series please visit here: https://www.youtube.com/watch?v=QkPcfCRr0DY&list=PLLtUqNwAJJfPQXkx5d9mWwRwzedqtrwoh&index=2
In this blog we present our summary of the fourth video in the series where Size Factor has been discussed. (Emphasis Ours. The screenshots have been taken from the presentation given by Rajeev Thakkar).
Size Factors
Is it beneficial to invest in smaller companies?
Starting and Ending Points matter
- In good economic conditions, small companies significantly outperform
- In bad economic conditions, small companies significantly underperform
- In long periods, size factors give small additional returns (IF ANY)
The above data and graps were for USA. But What holds true of USA doesn’t hold true for India.
According to the data published by Messes Sobhesh Agarwalla, Joshy Jacob, Jayanth Varma on IIMA website, the contribution of Size Factor in India from Jan 1994 is Negative!!
Size alone will not result into underperformance or over performance.
Quality is important
- Some Enron and Satyam scandals do happen in large caps
- However, you find a lot more junkies in small caps
- Eliminating junks improves returns of small companies significantly
Some peculiarities in small-caps
- Daily volumes are low, impact cost is high
- Don’t have too big corpus to invest in small caps in short time
- Information availability is a challenge, can’t rely on secondary data (provided in Annual report etc) only
- Management/ Key person risk is high
- Buy when seller is desperate not when you have money
- Due to impact cost and other reasons, small-cap investing is similar to private equity investing to institutional investors
The hurdles of journey from Small Cap to Large Cap
Not every small cap company will become a large cap company, base rates are very-very low, figure out scalability, some companies might lack because of no access to capital, talent, size of opportunity etc
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