In this episode of the [i3] Podcast, I'm speaking with Richard Brown, who is a Client Portfolio Manager with Janus Henderson Investors. And today we are going to talk about global small caps. We look at whether small caps are affected by the increasing concentration of the equity markets, particularly in the US, where technology stocks have dominated returns in recent years. We talk about catalysts for unlocking the current small cap discount versus large caps, including the rate environment and the current business cycle. And we take a look at a few case studies of where to invest and where not, involving fuzzy pandas, Italian industrial stocks and JB Hi Fi. This episode was sponsored by Janus Henderson Investors, and as such, the sponsor can make suggestions for topics, but the final control remains with the Investment Innovation Institute.

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Overview of Podcast with Richard Brown, Client Portfolio Manager, Janus Henderson Investors

02:00 The appeal of small caps and the case for egg producers

08:00 Does the concentration in equity markets and the increasing value of the Magnificent Seven require you to adjust valuation models for small caps?

09:30 The small cap discount to large caps has reached quite an extreme by historical standards

11:30 More clarity on the direction of rates would help small caps

13:30 There is an opinion that if rates stay higher for longer, then that would be bad for small caps. That is something we fundamentally disagree with.

14:00 The consensus view that small caps have underperformed as rates have gone up, that just hasn’t been true versus history

18:00 About 30 per cent of small cap companies in the US has had a negative EPS over the last two calendar years

20:00 The two catalysts for small caps: clarity on rates environment and confidence in business cycle

23:00 Are the future small caps all about AI?

26:00 Examples of AI small caps; filling in doctor’s insurance papers

36:00 Healthcare, REITs and the dangers of playing the sector game

41:00 Examples of what not to invest in: the case of an Italian industrial company

43:00 Fuzzy panda, short-selling and meme stocks

45:00 Is there a small cap premium in the Australian market? Maybe, but JB Hifi has been one of our strongest performers

 

Full Transcription of Episode 119

Wouter Klijn  00:00
In this episode of the [i3] Podcast, I'm speaking with Richard Brown, who is a Client Portfolio Manager with Janus Henderson Investors. And today we are going to talk about global small caps. We look at whether small caps are affected by the increasing concentration of the equity markets, particularly in the US, where technology stocks have dominated returns in recent years. We talk about catalysts for unlocking the current small cap discount versus large caps, including the rate environment and the current business cycle. And we take a look at a few case studies of where to invest and where not, involving fuzzy pandas, Italian industrial stocks and JB Hi Fi. This episode was sponsored by Janus Henderson Investors, and as such, the sponsor can make suggestions for topics, but the final control remains with the Investment Innovation Institute.

Richard, welcome to the podcast.

Richard Brown  02:10
Hi Wouter. Thank you. Delighted to be here.

Wouter Klijn  02:14
So why small caps? How did you get involved in this particular area of investment?

Richard Brown  02:18
Look, I think small cap is one of the most interesting areas you can be involved in, in capital markets, in truth, huge inefficiencies available for active stock pickers. You know that can certainly peak at peak interest. But you also end up looking at some very bizarre and unusual areas of the market. You know, egg producers, other companies working in particularly niche areas of the market. And you know that that that sort of area of small cap has always sort of piqued my interest and draw me to