In this recording of his keynote to the 5th BizNews Conference, a global investment specialist poses a question that’s quickly answered but rarely acted upon. With a few notable exceptions, financial advisors tend to steer their clients towards the ‘safety’ of portfolios managed by big management houses – but as Peche argues here, that security is primarily for the advisor themselves. As the world’s most quoted investor Warren Buffett continuously reminds us, the size of a portfolio is an anchor to its growth. In this excellent presentation, Peche uses rationality and data to argue why Buffett is right, explaining why better returns will flow from re-assessing.
Timestamps for the presentation below:
- Sean Peche on whether being UK-based gives him an advantage as an investor – 05:35
- On the difference in definition of small-cap funds in South Africa, UK, and USA – 10:30
- On what a boutique fund is and the associated advantages – 13:25
- On passive funds – 21:10
Some extracts from the presentation:
Sean Peche on the difference in definition of small-cap funds in South Africa, UK, and USA
I want to run through a few definitions, because when you mention small-cap in South African terms or to a UK or American-based investor, they often mean different things, and there’s no global classification that defines what the market cap is for a small-cap and a mid-cap, etc. But what does give an example of that is the MSCI World Index which looks at large, mid, and small-cap indices, which gives you an example of how those indexes are composed. So the large-cap index has 675 constituents. The largest market cap is $2.3 trillion, and that’s Apple. And the median market cap of those 675 is 37 billion. The MSCI World Mid-Cap index has 833 constituents, with the largest market cap at 38 billion, the median is about 8 billion. The small-cap has 4434 constituents, of which the largest market cap is 14 billion, and the median market cap is one billion. And you can immediately see, well, hang on, how can the 14 billion not be in the large market cap? And I guess things move around. But also, if you wanted to buy a small-cap ETF, you get four or five exposures to 4400 stocks out there. So the point being that, 30 of the JSE top 40 companies are less than $14 billion. And on that basis, you know, including these companies: Shoprite, Nedbank, Sasol and Sanlam. So when we talk about small-caps internationally, we are actually talking seriously about big companies in terms of, of local size.
On what a boutique fund is and the associated advantages
It’s a small fund manager, so it would be like us, if you look at it in South African terms – you know the boutiques: 36One, Counterpoint, Ranmore and PSG would arguably be boutique. Allan Grey, Coronation those guys would not be. In terms of large funds, in 2020, a UK business school did an analysis of European funds – 780 long-term mega funds – over 20 years and they concluded that specialist boutique managers outperform their larger counterparts especially in mid and small-cap tiers and so you can see the same thing comes through if you focus on boutiques that spend more time finding opportunities in the smaller and mid-cap companies, you can do very well. What about South Africa? Well, we just had Alec mention the Morningstar nominations. Go and have a look at the list of fund managers who’ve been nominated in Morningstar. So it’s included us in the global equity portfolio and 36One in the local equity sector. But you won’t see many big names. They will all be the smaller fund managers.
On Passive funds
Passive funds are index funds. They’re not run by active managers. What percentage does Apple comprise in the world index? I know in the S&P, it’s about seven and a half. I think of the world index nearly 5. That means for every hundred dollars you buy and invest in a passive fund, $5 goes into Apple. Whether or not Apple is a great investment opportunity. But what you have today is because of that huge amount of money moving into US companies, etc. Nearly 70% of the world index is in North American companies. Go and have a look at the fund fact sheets of the funds you’re invested in. You will not find a very different number from that in most of those fund fact sheets. In Europe, only 20%, in Japan ten and Magnus mentioned that they like Japan, we love Japan. I mean we’ve got as much in Japan as we have in US equities. But back in 1988, Japan was 40% of the world index and the US was far lower. And then you had the Japanese collapse and it all collapsed in tiers. But Japan is an amazing place and we love those companies and are quite heavily invested now. So what does that mean? It means today most people are invested the same way. And they’re in passives. They’re in the US. They’re in large-cap and in growth. And they’re underweight active funds ex-U.S, middle, small-cap and value. This seesaws up and down but just imagine when people start to shift, and they will shift, the passive won’t shift first, it’ll be the aggressive hedge funds that all of a sudden will start shorting US companies, etc. They will start shifting and you just need a little bit of money to start moving from the US to Europe and to Japan, because those places, Europe and Japan are not as liquid as the US. It’s much easier to sell $10 million at JP Morgan than it is to buy $10 million of Deutsche Bank. You wont move the price of JP Morgan but you’ll definitely move the price in Deutsche Bank. The problem now is growth is shrinking.
