Who should develop solutions for the greatest challenges facing us in the future? “Not politicians, not movements – only companies can do that,” said Dr. Götz Albert, CIO of Lupus alpha, one of around 2,000 small and mid caps in the European equity market. “The future is full of possibilities,” said Albert, pointing out that whether in Industry 4.0, personalised medicine or logistics, small and medium-sized companies are present with their products everywhere and often have a leading position in the global market as hidden champions.
He explained that the diversity among these companies is greater than among large cap stocks, with compelling individual stocks to be found in almost every sector. As a result, Albert believes that it is now time to bring these stocks out of their niche. An investor in the audience asked how these stocks should be distributed within an equity portfolio. Albert’s recommendation was to invest 70 percent in large caps passively managed in ETFs, and 30 percent in actively-managed small and mid caps.
“Previously, investors increased or decreased their holdings in small and mid caps on a cyclical basis. Today we need to do both,” he explained. He added that the segment has been increasingly incorporated into allocations since 2010. “This is undoubtedly due to the fact that small and mid caps have grown more strongly in structural terms than large caps since 2000,” Albert said, explaining that large caps have risen by an average of 1% p.a. at index level in recent years, compared to around 6% for small caps.
However, he believes that the sector will only become truly exciting when alpha with active management is taken into account, “as alpha on alpha acts like compound interest”. Over the past ten years, Lupus alpha Smaller German Champions has beaten its benchmark index by more than two percent with average gains of 14.97% p.a. As a result, the gap between the index and the fund has grown from 236.8% to 303.8%. As Albert explained, “that is more than 60 percentage points in additional returns, purely due to the compound interest effect.”