Why invest in small caps – and how to invest successfully?

Allianz Global Investors
Why invest in small caps –
and how to invest successfully?
September 2013
Allianz Global Small Cap Equity
Ultra-low nominal interest rates and negative real
interest rates have led many investors in deve­loped
countries to shift their money into equities, which
still offer an attractive potential for real return.
Andrew Neville
Fund manager
When investing in equity markets, most investors
tend to prefer stocks of large companies (“large
caps”, “blue chips”), mostly for liquidity reasons.
Hence, large caps have been more popular. This has
resulted in new historical highs for major equity
indices such as the S&P 500 – which peaked in
August 2013 at a level of 1,709.67. What has largely
gone unnoticed, however, is the equally strong
performance shown by smaller companies (“small
caps”). Indeed, small caps have historically tended
to perform better than large caps, particularly in
times of economic recovery.
Indeed, while large caps tend to be driven by global
macroeconomic trends, the performance of small
caps is more heavily dependent on company-specific
fundamentals and local economic factors. Therefore,
partly repla­cing large caps exposure with an allocation to global small caps may improve the risk-return
profile of a portfolio significantly.
Local knowledge is key
Global small caps are thus blessed with the twin
prospects of high absolute returns as well as
attractive risk-adjusted returns. However, successfully investing in this market segment
requires specialized and scarce capabilities. As
the small cap universe is particularly large and
companies often have strong ties to domestic
markets, dedicated research resources as well as
a local presence are indispensable.
Diversification taken one step further
Global diversification has played an increasingly
important role as part of investors’ strategic asset
allocation, in particular with regard to the management of portfolio risk factors. But as many investors
tend to have a large cap
bias in their portfolios,
global diversification alone
is not enough.
FOR FUND DISTRIBUTORS AND
PROFESSIONAL INVESTORS ONLY
Understand. Act.
Allianz Global Small Cap Equity
Blake Burdine
San Diego
Bjoern Mehrmann
Frankfurt
Andrew Neville
London
Frank Hansen
Frankfurt
John McCraw
San Diego
Dennis Lai
Hong Kong
Robert Marren
San Diego
Amanda Su
Hong Kong
Matthew Axline
San Diego
important part of our investment process. This is reflected by
the more than 2,000 company meetings p.a. undertaken by our
small cap experts. Using this local expertise allows us to gain a
structural information advantage.
Allianz Global Small Cap Equity combines the best ideas from our
dedicated and stand-alone regional portfolios in the US, Europe,
Japan and Asia-Pacific (ex Japan). Thus, we are able to offer investors a global portfolio consisting of those companies where our
regional fund managers have the highest conviction.
Koji Nakatsuka
Tokyo
Stephen Lyford
San Diego
Michael Schopf
Frankfurt
Matthew Hall
London
Peter Kraus
Frankfurt
Exploiting information inefficiencies
Analyst coverage of small caps is much lower than that of blue
chips. Of the overall 16,000 listed smaller companies in the
world, 5,000 are not covered by a single broker and almost
6,000 are covered by less than 5 brokers. This compares with an
average of 30 analysts covering each stock in the German large
cap index DAX. Hence, the small cap segment is underresearched and characterized by lower information efficiency.
In addition, small cap companies often have strong ties to local
culture, local business practices and local trends, which results
in even higher information barriers in particular for outsiders.
Why is local presence important ?
We strongly believe that local expertise is the key to identifying the
best small companies around the globe. To deeply understand an
investment candidate’s business model, its potential and real value,
it is indispensable to be familiar with the local markets and to
understand their commercial environment.
Local analysts and managers can directly meet with the company
management, and with customers. They thus gain deeper insights
into a company‘s situation, its opportunities and challenges.
Our strategy: Choose locally – invest globally
In the Allianz Global Small Cap Equity fund, we combine the
expertise of four teams of regional small cap experts, who
already successfully manage regional small cap portfolios.
These regional managers are in a much better position to
understand the local challenges of their investments. Consequently, in-depth company research on a local level is the most
Tadano is an example of such a high conviction idea:
This company is the largest manufacturer of cranes and
­aerial work platforms worldwide. Tadano has a significant
market share of 50 % in the Japanese market and 25 % market
share globally. It benefits from the ongoing reconstruction
work in Japan follo­w ing the devastating 2011 earthquake
and tsunami. Growing infrast­r ucture ­projects in emer­ging
countries should further drive its global expansion.
Another interesting investment idea is the French health care
company Sartorius Stedim Biotech. The company is one of
the world‘s leading providers of laboratory and process technologies and equipment, with a focus on the bio-pharma market. It has a strong basis in all growth regions with a share of
20 % of total sales in Asia.
IDEA
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FUNDAMENTAL
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FUNDAMENTAL
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STRUCTURING
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SUB PORTFOLIO
CONSTRUCTION
SUB PORTFOLIO
CONSTRUCTION
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CONSTRUCTION
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CONSTRUCTION
USA
Sub Portfolio
80 – 100 stocks
European
Sub Portfolio
40 – 45 stocks
Asia Pacific ex Japan
Sub Portfolio
15 – 20 stocks
Global Small Cap Portfolio
155 – 190 stocks
Japanese
Sub Portfolio
20 – 25 stocks
Allianz Global Small Cap Equity
Portfolio construction: Combining the best picks of our
local experts into one fund
The Allianz Global Small Cap Equity fund is not a reflection of
the ability of any one person or any team – it is a reflection of the
combined abilities of our regional small cap teams who implement their highest conviction ideas within a risk-controlled portfolio framework.
Lead manager Andrew Neville constructs the portfolio and
monitors overall risk. He acts as the sparring partner of the
regional management teams, and an efficient information flow
on investment ideas, portfolio positioning as well as risk exposures is constantly ensured.
Key information
ISIN / German security no.
LU0885397702 / A1KCHF
Benchmark
MSCI World Small Cap
Total Return (Net)
Umbrella
Allianz Global Investors Fund
Management company
Allianz Global Investors,
Luxembourg S.A.
Custodian bank
State Street Bank
­Luxembourg S.A.
Launch date
18 / 06 / 2013
Fund manager
Andrew Neville
Fund currency
USD
Financial year end
30 / 09
First financial year until
30 / 09 / 2013
Distribution
accumulation
Registered for sale in
AT, DE, NL, LU, FI, FR, ES, SE,
IT, NO, GB
Front-end load (%) 1
0.00 (max. 2.00)
Management fee (% p.a.) 1
currently 0.88 (max. 1.00)
Administration fee (% p.a.) 2
currently 0.20 (max. 0.50)
TER in % 3
n.a.
ny front-end load charged at the acquisition of the fund units may accrue in full to the sales partner. The exact amount shall be mentioned by the sales part ner during
A
the investment advice talks. This also applies to any trail fees paid by the Management Company to the sales partner from the management fee.
The administration fee applies a flat rate to certain fund expenses that have so far been charged separately to the Fund’s assets and which are included in the TER.
3
TER (Total Expense Ratio): Total cost (except transaction costs) charged to the fund during the last financial year. Will only be available after the first business year.
1
2
A performance of the strategy is not guaranteed and losses remain possible.
Investing involves risk. The value of an investment and the income from it may fall as well as rise and investors may not get back the full amount invested.
Allianz Global Small Cap Equity is a sub-fund of Allianz Global Investors Fund SICAV, an open-ended investment company with variable share capital organised
under the laws of Luxembourg. The volatility of the fund unit prices may be strongly increased. Past performance is not a reliable indicator of future results. If
the currency in which the past performance is displayed differs from the currency of the country in which the investor resides, then the investor should be
aware that due to the exchange rate fluctuations the performance shown may be higher or lower if converted into the investor’s local currency.
This is for information only and not to be construed as a solicitation or an invitation to make an offer, to conclude a contract, or to buy or sell any securities. The products or
securities described herein may not be available for sale in all jurisdictions or to certain categories of investors. This is for distribution only as permitted by applicable law
and in particular not available to residents and /or nationals of the USA. The investment opportunities described herein do not take into account the specific investment
objectives, financial situation, knowledge, experience or specific needs of any particular person and are not guaranteed. The views and opinions expressed herein, which
are subject to change without notice, are those of the issuer and /or its affiliated companies at the time of publication. The data used is derived from various sources, and
assumed to be correct and reliable, but it has not been independently verified; its accuracy or completeness is not guaranteed and no liability is assumed for any direct or
consequential losses arising from its use, unless caused by gross negligence or willful misconduct. The conditions of any underlying offer or contract that may have been,
or will be, made or concluded, shall prevail.
Contact the management company Allianz Global Investors Luxembourg SA in the fund’s country of domicile Luxembourg or the issuer electronically or via mail at the
address indicated below for a free copy of the sales prospectus, the incorporation documents, the latest annual and semi-annual financial reports and the key investor
information document in English. Please read these documents - which are solely binding - carefully before investing.
This is a marketing communication. Issued by Allianz Global Investors Europe GmbH (www.allianzgi-regulatory.eu), a limited liability company incorporated under the
laws of Germany with its registered office at Bockenheimer Landstrasse 42 – 4 4, D-60323 Frankfurt / Main, authorized by Bundesanstalt für Finanzdienst­leistungsaufsicht
(www.bafin.de). The duplication, publication, or transmission of the contents, irrespective of the form, is not permitted.
Source: Allianz Global I­ nvestors; data as at 31 / 08 / 2013