Chartwell Asia ETF
Article Overview
Chartwell Asia zeros in on an under the radar screen investment theme and then lays out several creative options to capitalize on it.
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Monday, June 12th, 2006
Think Small and Big
I plead guilty to having a bias to large cap stocks in my portfolio. It wasn't always this way. My first job in the investment business was with an investment bank that specialized in smaller companies and, at that time, my portfolio was chock full of them.
It seems that investors, based on their personalities, tend to favor either large cap or small - mid cap stocks. Many are comforted by the perceived quality and security that comes with large well known brand companies. A distinct minority are attracted to the potential for outsized capital gains and the higher risks that come with investing in smaller companies.
What investors really need is a split personality so they can be open to both big and small companies when searching worldwide for growth and value opportunities.
Large, well known companies do have the advantage of a long track record, a deep and talented management pool and the ability to raise prodigious amounts of capital. Many also have strong brand names as well as tentacles in markets around the world that make them a good play on global growth.
But keep in mind that much of this value is intangible. In their book, Strategy Maps Robert Kaplan and David Norton estimated that up to 75% of the value of a major corporation is not even measured by a company's financial system. This value might include human capital, brand name and customer loyalty.
While all of this is valuable, it certainly does not immunize big companies against the twin threats of complacency and competition. Even just a few years ago, how many of us would have anticipated Sony's market value being eclipsed by Samsung Electronics or the once mighty GM's debt being relegated to junk bond status. In addition, the bigger a company becomes the harder it is to put up impressive earnings numbers on a percentage basis.
With $68 billion in annual sales, Procter & Gamble, in the middle of integrating its Gillette acquisition, needs new products and markets to maintain its growth. The head of Procter & Gamble, A.G. Lafley, spent four years with the company in Japan and sees tremendous opportunity in emerging Asia. While it took 14 years for P&G's operations in Japan to become profitable, its China business became profitable after only six years and he believes the company's products are so far reaching only about 300,000 Chinese consumers.
But because of its huge size, Procter & Gamble is at best an indirect play on Chinese and emerging market consumer growth. An analysis by Morningstar predicts that after Gillette is integrated annual sales growth will be about 5%. Not bad but hardly explosive.
A stable of blue chip companies like P&G and Samsung as the backbone of your equity portfolio is fine but to generate substantial gains and wealth, you need to look to smaller companies that have the potential to grow much more quickly.
To turn the risk/reward ratio in your favor you will need to do your homework and treat your small cap portfolio a little like a venture capital fund. In my book "The New Global Investor", I posed the following question: what would you prefer, investing $10,000 in Merck or $1,000 each in ten small cap pharmaceutical companies?
I would choose the latter since even if only a few of the small companies are successful they will likely more than offset the losers.
The same principle applies to investing in Chinese economic growth. If you plan on participating in the upcoming Bank of China IPO, why not scale back a bit and look at some smaller private alternatives?
Dah Sing Financial (0440.HK) (for non-American investors)is trading at 10.4 times earnings and 1.5 times book based on Morgan Stanley 2007 estimates. The expected Bank of China IPO price range is 1.9 to 2.2 times current book value. Dah Sing, currently trading at $HK64.50, is Morgan Stanley's top bank pick in Hong Kong and the firm recently raised its price target to $HK 77.
Or if you prefer to leave the stock picking to others and want to tap into smaller companies on a global scale, take a look at the Luxembourg-registered Franklin Global Small-Mid Cap Growth Fund. During the twelve month period ending April 31, 2006, the fund was up 49.8 %. So keep a nice blend of big and small companies in your global portfolio that fits your financial goals and risk profile.
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