Gideon Smith, Chief Investment Officer for Europe at AXA Rosenberg, comments on market opportunities for small cap stock pickers


Gideon Smith, Chief Investment Officer for Europe at AXA Rosenberg, comments on market opportunities for small cap stock pickers

"I believe we are entering a period of opportunity for stock pickers to potentially deliver above average returns from small cap shares" says, Gideon Smith, Chief Investment Officer for Europe at AXA Rosenberg, the focussed quantitative equity expertise of AXA Investment Management.


  • Low market volatility relative to that experienced between 2007-2011, has created an environment we believe is conducive to small cap stock picking
  • Globally, 134 small caps outperformed best performing large cap stock in Europe for H1 2014 (Source: Bloomberg, data as at 30 June 2014)


"Volatility in financial markets has dropped significantly since the violent fluctuations of 2007 to 2011, when geopolitical and macroeconomic concerns dominated the minds of investors.  The high volatility during that time conditioned the mind-set of many investors and is only now beginning to change, as reflected in the relatively muted impact on markets from recent events in Ukraine and Iraq.  This shift in investor sentiment is spawning increased confidence that economic growth is taking root in developed economies, excluding continental Europe, which is not quite there yet. 

"As concerns about the macro environment have abated, investors have been able to shift their attention to the micro environment such as company valuations and sentiment driven investments. In our opinion this has created an environment highly conducive for stock-picking, bringing fundamental and company-specific factors to the foreground in driving equity valuations.

"We regard an allocation to small caps as the cornerstone of a well-balanced and diversified portfolio, and our investment process filters companies in order to identify potential equity outperformers delivering strong, stable and growing earnings. Small caps should offer a richer opportunity set for stock pickers given the abundance of small cap stocks relative to large caps.  Take for instance the best performing large cap stock in Europe during the first half of 2014 - Shire PLC (up 67% in EUR terms) - yet there were 134 small cap companies globally that outperformed it. Indeed, the S&P Developed Small Cap Index has always outperformed the MSCI World Index on a rolling 10-year basis since 1994 and 78% of the time on a rolling five-year basis (Source: Bloomberg, data as at 30 June 2014).

"The resistance to investing in small cap stocks often stems from the view that they are deemed expensive when measured by standard valuation metrics. For examples the MSCI World Index traded at 18.5 times trailing earnings at the end of June compared with a multiple of 24.6 for the S&P Developed Small Cap Index.

"However, simply taking out the unprofitable companies removes their distortive effect from the p/e calculation, and in our example brings the S&P Developed Small Cap Index down to a multiple of 19.2x trailing earnings at the end of June.  Doing the same for the MSCI World Index adjusts its p/e to 17.8x, a much smaller adjustment.  At the same time, our analysis also shows the cheapest 20% of small cap companies currently trade on a P/E ratio of 7.9 times which is more attractive than the equivalent cheapest 20% for large cap which currently trade at 8.3%".  In other words, although there are lots of expensive, loss making small caps, there are plenty that generate higher levels of earnings per share than large caps. Stock picking is therefore crucial when looking at small caps as an asset class.

"The unlikely prospect of interest rates soaring any time soon, means cash is earning little on deposit, however improving growth prospects and a fall in volatility - makes it a potentially propitious time for investors to invest in small caps – which we believe should be  better placed to capture the benefits of the improving global economic growth outlook."


About AXA Investment Managers

AXA Investment Managers is a multi-expert asset management company within the AXA Group, a global leader in financial protection and wealth management. AXA IM is one of the largest European-based asset managers with approximately €582 billion in assets under management as of the end of June 2014. AXA IM employs over 2,400 people around the world and operates out of 26 offices in 21 countries.

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