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Don't discount small caps: Gaynor

Investors should not be afraid of funds that have higher proportions of small cap stocks in their portfolio, says Milford Asset Management’s executive director.

Thursday, October 16th 2014, 6:00AM 1 Comment

On Monday, Good Returns reported that there had been criticism in the industry of Pie Funds’ handling of its investment in Titan, an energy services company.

It sold 3.6 million shares in the company as the price dropped from A$3.70 at the end of last year to A44c on Friday.

Pie Funds is believed to have started selling Titan in March this year and fully exited when the stock was priced at A64c.

Commentators said a large holding in smaller stocks could prove dangerously illiquid.

But Brian Gaynor said investments in smaller stocks could play a useful role. “Small cap companies, particularly small caps that then grow into big ones, give very good returns. Google, Apple, they were all small ones. If you invest at the right time you could very well. If you pick four or five, the returns to investors could be substantial.”

He said people who put money into Ryman Healthcare, Mainfreight and the Port of Tauranga in the 1990s would have done extremely well. “They were all tiny companies then and no one paid much attention but they’ve returned incredibly well. There’s a real role for well-managed small caps in the mix.”

Gaynor said they should not make up more than 7% or 8% of a fund. “The big thing is to have a diversified portfolio so you’re not taking bets on one or two companies, so if one or two go wrong it doesn’t blow the lights out.”

New Zealand managers were performing well and it was important that investors were not spooked, Gaynor said. “There are always mistakes but if you can get it right 80% of the time, you’re still going to do very well… one company going wrong doesn’t mean a good strategy turns into a bad one.”

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Comments from our readers

On 16 October 2014 at 2:13 pm NormanStacey said:
Brian is quite correct.
Also PIE funds is, and remains, a brilliantly successful manager. Massive return from a specialty.
If there were no single 'failure' of a holding, it could be argued that the manager is not maximizing diversification.
Managed funds are a good place to include small cap diversification in portfolios. Remember "risks which may be excessive in isolation may not be excessive in a portfolio context. Condider long/short pairs; one side should 'fail'.

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