Small Caps: Small-sized Companies’ Shares Perform Better on the Stock Market

RIO DE JANEIRO, BRAZIL – Small-cap funds were the most profitable type of equity investment fund in the 12-month period ended in November 2019: 40 percent, according to the most recent data released by the Brazilian Association of Financial and Capital Market Institutions (ANBIMA).

These funds privilege securities of amounts deemed low in the stock market, with a capitalization ranging from R$300 million (US$75 million) to R$2 billion. The stock portfolio consists of at least 85 percent of these shares, which are not listed among the 25 largest companies that make up the IBrX index, the Brazil Index of the Stock Exchange.

In a scenario of low-interest rates – the basic rate, the SELIC, is at the historical level of 4.5 percent per year – and with signs of economic recovery – consider the change in the perspective of credit rating awarded to the country by S&P recently, with the progress of the reforms – the stock market takes the lead among investments with the best yield.

In this context, small caps funds benefit from the spread of liquidity of larger assets listed on the Exchange, explained Rio Verde Investments manager Eduardo Cavalheiro.

According to him, when the country was suffering from the economic crisis, investors preferred the speed with which an asset could be traded.

“The liquidity of the Brazilian market is focused on large companies and investors wanted to keep the most liquid assets to make the decision to invest or divest at any time. Now, given the stability of the economy, investors realize that they don’t need it that much”.

Composition

The Small Cap Index (SMLL), which measures the profitability of a group of 75 shares, has accumulated a 50 percent increase in 2019, with a trajectory similar to that of the IBOVESPA, the main index of the Brazilian Stock Exchange, comprising 68 shares, which rose 28 percent in the same period.

However, the sectors’ representativeness in both indices is different. While one-third of the IBOVESPA consists solely of financial services shares, the Small Cap Index has the largest share, at 16.4 percent, of electric power company shares.

The greater variety of sectors that make up the index is pointed out by specialists as a positive point in terms of investment flexibility.

Economatica Investment Platform compiled the performance of all small caps shares listed on the Brazilian Stock Exchange: 14 of them had returns above 100 percent in 12 months; 12 had negative results.

Banco Pan (BPAN4) was at the top of the ranking, with returns of 383.79 percent.

According to the analyst of Ativa Investments Ilan Arbetman, Pan’s credit portfolio can explain its results, especially focused on financing vehicles, in the low and medium income market. “Moreover, they manage to have a relevant stability in their credit portfolio, largely due to the share of public servants and with a lower level of default”.

Rio Verde’s Cavalheiro mentioned residential real estate construction companies among the year’s standouts. “We are at the beginning of the strongest recovery cycle in the sector, with declining interest rates and greater availability of real estate financing”. Caixa bank, a leader in this type of credit, announced the reduction in interest rates for home loans the day after the last SELIC cut.

For experienced investors

Small caps are best suited for investors who are familiar with the stock market and know that they are susceptible to losses as well as profits.

“Those investing in large caps usually see their earnings correlated to the IBOVESPA. If the index has increased, so has my fund, which brings greater comfort. Small caps investors must know that the return is not immediate or priced,” explained Cavalheiro.

Regardless of the type of stock, investors must be prepared for market fluctuations.

Small caps usually belong to companies that are less consolidated when compared to those that make up the IBOVESPA. But Arbetman recalls that some of the large companies listed among small caps, such as Magazine Luiza (MGLU3), are currently one of the main retailers.

Source: InfoMoney