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Wednesday 25 February 2009
Stick to big cap stocks under current market condition
“There’re billions and billions of pounds of trapped illiquid capital, which can sink entire institutions,” Corsellis said. “We’ve only seen the tip of the iceberg.”
Stick to big cap stocks under current market condition
Bloomberg 24 February 2009
European small-cap fund managers may be stuck with $67 billion in shares that are too tough to trade.
The number of stocks in the 1,122-company MSCI Europe Small-Cap Index that are difficult to sell, defined as taking at least one day to trade 1 million euros ($1.3 million) in holding, has jumped 85 percent to 724 last month from a year earlier, data compiled by Bloomberg show.
Plunging share prices triggered by the credit crunch and selling by hedge funds are hitting portfolios of Europe’s small-cap funds harder than bigger peers. As much as 46 billion pounds ($67 billion) in shares, equivalent to 90 percent of the combined market value of all European stocks that are worth less than 100 million pounds, weren’t traded in the past 12 months and the amount is set to increase, according to an estimate by London-based Marwyn Investment Management LLP.
“If you’re into European micro-caps right now, it’s a tough game,” said Raik Hoffmann, who runs two small-company funds at Deutsche Bank AG’s DWS Investment unit in Frankfurt, which oversees 700 million euros in smaller European stocks. He measures micro-caps as companies with less than 100 million euros in market capitalization. “It’s very hard to sell them in these markets.”
Investors in European small-cap funds have lost 37 percent of their money in the past year. The decline exceeded 31 percent for large-caps in the region, and 25 percent for U.S. small-cap funds, according to Chicago-based Morningstar Inc. The MSCI Europe Small-Cap Index has fallen 58 percent, compared with a 43 percent slide by the Russell 2000 Index, its U.S. counterpart.
Research Spending
“Liquidity is really an issue under the 300 million-euro threshold,” said Isabelle de Gavoty, who manages 500 million euros as part of AXA Investment Managers’ small-caps team in Paris. De Gavoty said she has turned to stocks that are worth more than 500 million euros.
A cutback in coverage of smaller companies by investment banks’ research departments also contributed to reduced liquidity, according to Frank van Wijk, an analyst at SNS Securities in Amsterdam. SNS is a contract market maker for about two dozen smaller stocks traded on the Amsterdam exchange.
In the U.S., even as equity value dropped as institutional investors sold more liquid stocks, many bought futures based on Russell 2000 as a hedge, said Christian Anderson, a Tacoma, Washington-based associate portfolio manager for Russell Investments, the creator of Russell 2000.
“The U.S. small-cap market isn’t like other markets where liquidity dried up,” Anderson said, adding that the least liquid 10 percent of stocks on the Russell 2000 outperformed the most liquid 10 percent by 1,200 basis points in 2008. “Volume has certainly been sufficient.”
Bang & Olufsen, Benetton
Bang & Olufsen A/S, the Danish maker of luxury stereo systems, has slumped 75 percent in the past year on the Copenhagen exchange. Last month, the number of shares traded shrank 81 percent. Based on yesterday’s volume, it would take 10 days to liquidate 1 million euros in shares of the company, which has a market value of about 133 million euros.
Other shares whose trading volume has fallen include Benetton SpA, Italy’s largest clothes maker, and Air Berlin Plc, Europe’s third-largest discount airline. Benetton shares have dropped 43 percent in Milan trading and Air Berlin has fallen 65 percent on the Frankfurt exchange in the past 12 months.
Bang & Olufsen’s January announcement to sell 400 million kroner ($68 million) in preferred shares will help enhance liquidity, spokesman Tino Pedersen said. Air Berlin spokesmen Hans-Christoph Noack said the stock’s free-float of more than 80 percent shows that it isn’t illiquid. A Benetton spokesman didn’t respond to a request for comment.
Shuttered, Merged
Since 2009, at least a dozen smaller-companies funds, including those run by DnB NOR ASA, Norway’s largest bank, and Frankfurt-based specialist Lupus Alpha Asset Management, have been shuttered or merged, Morningstar data show. That’s almost double the number in the year-earlier period, and compared with six closures in the U.S. this year.
“You can say I got the ungrateful task of closing down the small-cap fund,” said DnB’s Einar Johansen, whose 3 million-euro European smaller-company fund was liquidated last month. The Oslo-based manager said he may have to shut two more funds this year that invest in European and U.S. small-cap stocks.
As short-term bets by traders disappear, improved liquidity for European small-company stocks may not return for the next two years, said Ian Murrell, a London-based broker at Wills & Co. who specializes in U.K. small-caps.
European small-cap fund managers are coping with the growing pool of illiquid shares differently. While DWS’s Hoffmann had moved into bigger stocks in early 2008, Carsten Dehn said he’s been buying futures contracts on small-cap indices that are easier to sell than individual shares.
‘Tip of the Iceberg’
The Copenhagen-based manager of a 300 million-euro small-cap fund for SEB Asset Management also holds onto cash from stocks he has sold in takeovers and received from dividend payments.
In London, Marwyn Investment is setting up a fund that acquires portfolios of illiquid stocks, then works with company managers to find buyers such as U.S. investors and private equity firms. A listing on the London stock exchange for Marwyn Active Equity is planned for the beginning of the second quarter, Managing Partner James Corsellis said.
The $67 billion estimate of illiquid European small-cap stocks includes structurally illiquid shares such as family stakes, according to Marwyn.
“There’re billions and billions of pounds of trapped illiquid capital, which can sink entire institutions,” Corsellis said. “We’ve only seen the tip of the iceberg.”
1 comment:
Stick to big cap stocks under current market condition
Bloomberg
24 February 2009
European small-cap fund managers may be stuck with $67 billion in shares that are too tough to trade.
The number of stocks in the 1,122-company MSCI Europe Small-Cap Index that are difficult to sell, defined as taking at least one day to trade 1 million euros ($1.3 million) in holding, has jumped 85 percent to 724 last month from a year earlier, data compiled by Bloomberg show.
Plunging share prices triggered by the credit crunch and selling by hedge funds are hitting portfolios of Europe’s small-cap funds harder than bigger peers. As much as 46 billion pounds ($67 billion) in shares, equivalent to 90 percent of the combined market value of all European stocks that are worth less than 100 million pounds, weren’t traded in the past 12 months and the amount is set to increase, according to an estimate by London-based Marwyn Investment Management LLP.
“If you’re into European micro-caps right now, it’s a tough game,” said Raik Hoffmann, who runs two small-company funds at Deutsche Bank AG’s DWS Investment unit in Frankfurt, which oversees 700 million euros in smaller European stocks. He measures micro-caps as companies with less than 100 million euros in market capitalization. “It’s very hard to sell them in these markets.”
Investors in European small-cap funds have lost 37 percent of their money in the past year. The decline exceeded 31 percent for large-caps in the region, and 25 percent for U.S. small-cap funds, according to Chicago-based Morningstar Inc. The MSCI Europe Small-Cap Index has fallen 58 percent, compared with a 43 percent slide by the Russell 2000 Index, its U.S. counterpart.
Research Spending
“Liquidity is really an issue under the 300 million-euro threshold,” said Isabelle de Gavoty, who manages 500 million euros as part of AXA Investment Managers’ small-caps team in Paris. De Gavoty said she has turned to stocks that are worth more than 500 million euros.
A cutback in coverage of smaller companies by investment banks’ research departments also contributed to reduced liquidity, according to Frank van Wijk, an analyst at SNS Securities in Amsterdam. SNS is a contract market maker for about two dozen smaller stocks traded on the Amsterdam exchange.
In the U.S., even as equity value dropped as institutional investors sold more liquid stocks, many bought futures based on Russell 2000 as a hedge, said Christian Anderson, a Tacoma, Washington-based associate portfolio manager for Russell Investments, the creator of Russell 2000.
“The U.S. small-cap market isn’t like other markets where liquidity dried up,” Anderson said, adding that the least liquid 10 percent of stocks on the Russell 2000 outperformed the most liquid 10 percent by 1,200 basis points in 2008. “Volume has certainly been sufficient.”
Bang & Olufsen, Benetton
Bang & Olufsen A/S, the Danish maker of luxury stereo systems, has slumped 75 percent in the past year on the Copenhagen exchange. Last month, the number of shares traded shrank 81 percent. Based on yesterday’s volume, it would take 10 days to liquidate 1 million euros in shares of the company, which has a market value of about 133 million euros.
Other shares whose trading volume has fallen include Benetton SpA, Italy’s largest clothes maker, and Air Berlin Plc, Europe’s third-largest discount airline. Benetton shares have dropped 43 percent in Milan trading and Air Berlin has fallen 65 percent on the Frankfurt exchange in the past 12 months.
Bang & Olufsen’s January announcement to sell 400 million kroner ($68 million) in preferred shares will help enhance liquidity, spokesman Tino Pedersen said. Air Berlin spokesmen Hans-Christoph Noack said the stock’s free-float of more than 80 percent shows that it isn’t illiquid. A Benetton spokesman didn’t respond to a request for comment.
Shuttered, Merged
Since 2009, at least a dozen smaller-companies funds, including those run by DnB NOR ASA, Norway’s largest bank, and Frankfurt-based specialist Lupus Alpha Asset Management, have been shuttered or merged, Morningstar data show. That’s almost double the number in the year-earlier period, and compared with six closures in the U.S. this year.
“You can say I got the ungrateful task of closing down the small-cap fund,” said DnB’s Einar Johansen, whose 3 million-euro European smaller-company fund was liquidated last month. The Oslo-based manager said he may have to shut two more funds this year that invest in European and U.S. small-cap stocks.
As short-term bets by traders disappear, improved liquidity for European small-company stocks may not return for the next two years, said Ian Murrell, a London-based broker at Wills & Co. who specializes in U.K. small-caps.
European small-cap fund managers are coping with the growing pool of illiquid shares differently. While DWS’s Hoffmann had moved into bigger stocks in early 2008, Carsten Dehn said he’s been buying futures contracts on small-cap indices that are easier to sell than individual shares.
‘Tip of the Iceberg’
The Copenhagen-based manager of a 300 million-euro small-cap fund for SEB Asset Management also holds onto cash from stocks he has sold in takeovers and received from dividend payments.
In London, Marwyn Investment is setting up a fund that acquires portfolios of illiquid stocks, then works with company managers to find buyers such as U.S. investors and private equity firms. A listing on the London stock exchange for Marwyn Active Equity is planned for the beginning of the second quarter, Managing Partner James Corsellis said.
The $67 billion estimate of illiquid European small-cap stocks includes structurally illiquid shares such as family stakes, according to Marwyn.
“There’re billions and billions of pounds of trapped illiquid capital, which can sink entire institutions,” Corsellis said. “We’ve only seen the tip of the iceberg.”
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