Small Caps  

Mifid II 'creates opportunities' for small cap investors

Mifid II 'creates opportunities' for small cap investors

Small cap funds could benefit from rules introduced by Mifid II, a fund manager has said, in contrast to gloomy predictions made previously by many of his peers.

Trevor Gurwich, who manages $2.3bn (£1.8bn) in small cap assets including the American Century Global Small Cap Equity fund, was speaking as his company launched a version of this fund available to European investors in partnership with Normura.

He said 13 per cent of the companies in his fund's investable universe had no analyst coverage at all and he said Mifid II's research rules could have the effect of cutting the number of analysts covering smaller companies even further, increasing the number of opportunities for investors to find returns themselves before others do.

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Mr Gurwich said: "People make money from stocks because they identify opportunities before others. The number of analysts is probably going to go down with Mifid II and that's going to create more opportunities.

"As long as it doesn't obliterate the analyst community, Mifid II will increase the opportunities."

The Mifid II rule requires firms to disclose to clients how much they are charging for research.

Previously brokers would supply research on companies to fund managers for free, and in exchange they would receive stock broking commissions to buy or sell shares on behalf of the fund.

But the Mifid rules took the view that this was not in the client's best interest so fund houses were forbidden from accepting free research and must now report to the client how much they are paying for the research.

Earlier this week Steven Fine, chief executive of broker Peel Hunt, said the rule would mean less research would be produced on smaller companies, leading to smaller company share prices falling

Mr Gurwich said that unlike some small cap fund managers who invest in companies with a view to holding onto them for many years, he aims to keep companies in his portfolio for at most two years.

He said: "We are very programmatic with our companies. Our typical time horizon is 12 to 18 months and we want to see visible improvement in that time period.

"We believe earnings drive stock prices and you often have a lot of behavioural biases in the minds of analysts and we are usually ending our position when you start to see the company's fundamentals exciting analyst expectations.

"You are taking advantage of that earnings growth and you get the biggest bang for your buck because you catch the surprises.

"As time goes on the company matures and you start seeing a slowing down of the revenue growth rate."

The fund is also managed under the UN Global Compact guidelines and will not invest in companies that are on the exclusion list recommended by the Council on Ethics of the Norwegian Government Pensions Fund Global.

Its Ucits version will be added as a sub-fund to the Nomura Funds Ireland platform, which currently has $7.6bn (£5.9bn) in assets under management.