A comparison of the risk/return profiles of large, mid and small cap segments in Europe

Transcription

1 A comparison of the risk/return profiles of large, mid and small cap segments in Europe March 2015 Part 2

2 Introduction Tracking the performances and behavior of different categories of stocks can only be done by referring to stock indexes. The composition of such indexes is generally revised monthly according to criteria of size (market capitalisation) and liquidity (trading volume). In the second part of our study, we compare stock performances for three categories of listed companies segmented by their market cap segment. Two preliminary remarks: - For small caps, our study is based exclusively on national indexes (France and the UK) as pan- European indexes were only created in Dividends are not taken into account in the indexes used in this overview as this calculation method only became available in This factor is unfavourable to large caps which traditionally pay out more dividends. Contacts : MiddleNext : General Manager: Caroline Weber c.weber@middlenext.com 33 (0) Financière de l Echiquier : Report coordinator: Gaël Faijean gfaijean@fin-echiquier.fr 33 (0) Marketing & Communication: Sophie Thiard sthiard@fin-echiquier.fr 33 (0) Managers - Small & Mid caps Europe: José Berros (jberros@fin-echiquier.fr) & Stéphanie Bobtcheff (sbobtecheff@fin-echiquier.fr) 2

3 Dec-04 Apr-05 Aug-05 Dec-05 Apr-06 Aug-06 Dec-06 Apr-07 Aug-07 Dec-07 Apr-08 Aug-08 Dec-08 Apr-09 Aug-09 Dec-09 Apr-10 Aug-10 Dec-10 Apr-11 Aug-11 Dec-11 Apr-12 Aug-12 Dec-12 Apr-13 Aug-13 Dec-13 Apr-14 Aug-14 Dec-14 Comparative 10-year performances This chart compares 10-year performances (base 1000 at 31/12/2004) of STOXX indexes: the Large 200 index (median capitalisation of 24.2 bn), the Mid 200 index (median capitalisation of 6.2 bn) and the Small 200 index (median capitalisation of 3 bn) Indice large Europe Indice Mid Europe Indice small Europe Ten-year returns can be summarised as follows: 10-year Annualised Volatility Max Indexes return return drawdown LCXP index - Large Europe 29% 2.6% 14% -56% MCXP index - Mid Europe 75% 5.7% 16% -59% SCXP index - Small Europe 79% 6.0% 18% -62% Source: Bloomberg / Financière de l Echiquier The performance gap between large and mid & small caps is 120%/130% over 10 years though with higher risk measurements. Volatility is 15% to 30% higher for mid and small cap segments for a maximum drawdown for the period that is 6% to 10% higher. On an annualised and risk-adjusted basis, the performance gap between large and mid cap segments is therefore 90% over 10 years (83% for small caps). 3

4 Dec-04 Apr-05 Aug-05 Dec-05 Apr-06 Aug-06 Dec-06 Apr-07 Aug-07 Dec-07 Apr-08 Aug-08 Dec-08 Apr-09 Aug-09 Dec-09 Apr-10 Aug-10 Dec-10 Apr-11 Aug-11 Dec-11 Apr-12 Aug-12 Dec-12 Apr-13 Aug-13 Dec-13 Apr-14 Aug-14 Dec-14 Focus on three main markets: the UK, Germany and France. The UK, Germany and France represent 53% of the total European market for listed companies for all market cap categories combined. For the purpose of this comparison, we used the following local stock indexes. For mid caps: MID60 in France, MDAX in Germany and MCIX in the UK (base 1000 at 31/12/2004), providing for a comparable medium capitalisation of around 3 billion. For small caps: CAC Small (median capitalisation: 117 million) in France and FTSE Small Cap for the UK (median capitalisation: 300 million) CAC Small Index (FR) MCIX Index (GB) MDAX Index (Ger) MID60 Index (FR) Indice FTSE small UK Comparative data for these benchmarks break down as follows: Indexes 10-year return Annualised return Volatility Max. drawdown Large Europe index (for comparison) 29% 2.6% 14% -56% MDAX index (Germany) 215% 12.2% 21% -60% MCIX index (UK) 140% 9.2% 18% -51% MID60 index (FR) 110% 7.7% 18% -55% FTSE Small Cap index (UK) 58% 4.7% 18% -59% CAC Small index (FR) 50% 4.1% 20% -65% Accordingly, small caps (FR and UK) display an annualised and risk-adjusted performance gap of 13% for the French benchmark and 44% for the UK benchmark compared with the Large Europe benchmark. Over this same period, the annualised and risk-adjusted performance gap between German mid caps and the Large Europe benchmark is 222% (371% for gross annualised data), 185% for UK mid caps and 151% for French mid caps. 4

5 Dec-04 Apr-05 Aug-05 Dec-05 Apr-06 Aug-06 Dec-06 Apr-07 Aug-07 Dec-07 Apr-08 Aug-08 Dec-08 Apr-09 Aug-09 Dec-09 Apr-10 Aug-10 Dec-10 Apr-11 Aug-11 Dec-11 Apr-12 Aug-12 Dec-12 Apr-13 Aug-13 Dec-13 Apr-14 Aug-14 Dec-14 Do mid caps in the United States display the same profile of overperformance or is this a European specificity? The following chart presents three US indexes with median capitalisations profiles comparable our European selection: S&P 500 (median capitalisation: 22.6 billion), S&P Mid (median capitalisation 3 billion) and finely Russell 2000 (median capitalisation: 600 million) Russell 2000 Index (Small US) S&P Large Index S&P Mid Index Breakdown of data: 10-year Annualised Volatility Max. Indexes performance performance drawdown S&P Large index 70% 5.4% 15% -53% S&P Mid index 119% 8.2% 18% -51% Russell 2000 index (Small US) 85% 6.3% 20% -54% Gross performances are higher and performance gaps between large and mid/small caps narrower (weight of tech stocks in the US large cap index / growth differential in the US) but also risk data and above all the hierarchy (mid / small / large) are similar. These results in consequence confirm the structural overperformance of mid caps. 5

6 Why then do mid caps outperform the other segments? The analysis of French and German mid caps offers a response. Of the 109 companies today making up the two indexes, 77 were already listed at the end of 2004, of which 33 had market capitalisations under 1 billion 10 years ago. Between 31/12/2004 and 31/12/2014 these 33 stocks displayed aggregate growth in market capitalisation of 308% and a median performance of 250%, with the highest performance reaching +2610% and the lowest performance +38%. The other 44 stocks with market capitalisations exceeding 1 billion at 31/12/2004 generated an aggregate performance of 80% (+818% / -90% for the extremes). The more buoyant performance of mid cap indexes in relation to the other segments would appear to reflect the momentum provided from the success stories emerging from the magma of small cap segments. If one structural reason must be cited to explain this performance gap, it would be in our opinion this upward momentum highlighted in the first part of our analysis on the structure of European equity markets. Small caps form the base of the market pyramid, grouping 75% of total listed companies, and are naturally very diverse in nature. As they grow, these emergent success stories leave the small cap segments to bolster the ranks of the mid cap universe, and in so doing, boost its growth momentum. 6

7 Summary In this second part of our study, we have sought to shed light on how small and mid caps contribute to returns on savings. Analysis of stock performances of different European indexes between 2004 and 2014 confirms the key role of small caps in boosting equity market performances. Starting from that observation, two key points merit emphasising: 1) The small cap segment displays a risk/return profile marginally superior to that of large caps. In consequence, while investing in a specialised small-cap fund entails more risk for retail or institutional investors than investing in a large cap fund, the return thus generated covers this additional risk. 2) The success stories originating from the small-cap segment eventually feed into mid cap indexes. This in turn structurally contributes to a significant additional return "net of risk" to those investors who allocate a portion of their savings to this mid cap segment. The first part of our study focused on the structure of equity markets highlighted the interdependence of small / mid / large cap segments. The summary of the first part of this study concluded that large caps (less than 10% of listed companies) financed the entire equity market industry business model whereas the small and mid cap segments form the next generation of large caps that will provide this financing in the future. We consequently emphasised the critical importance of mid and small caps in the operating model of financial markets, keeping in mind that having a powerful financial market is of strategic importance for Europe. This second part of the study suggests that these small and mid cap segments provide a return on savings "net of risk" identical or higher than that of large caps. For that reason, incentive policies must be adopted in Europe to increase the share of savings invested in these segments in order to attract entrepreneurs and to maintain this winning momentum for all stakeholders. 7