119: Janus Henderson's Richard Brown – Small Caps in a Concentrated World

In this episode of the [i3] Podcast, I'm speaking with Richard Brown, who is a Client Portfolio Manager with Janus Henderson Investors. And today we are going to talk about global small caps. We look at whether small caps are affected by the increasing concentration of the equity markets, particularly in the US, where technology stocks have dominated returns in recent years. We talk about catalysts for unlocking the current small cap discount versus large caps, including the rate environment and the current business cycle. And we take a look at a few case studies of where to invest and where not, involving fuzzy pandas, Italian industrial stocks and JB Hi Fi. This episode was sponsored by Janus Henderson Investors, and as such, the sponsor can make suggestions for topics, but the final control remains with the Investment Innovation Institute. __________ Follow the Investment Innovation Institute [i3] on Linkedin Subscribe to our Newsletter Explore our library of insights from leading institutional investors at [i3] Insights ________ Overview of Podcast with Richard Brown, Client Portfolio Manager, Janus Henderson Investors 02:00 The appeal of small caps and the case for egg producers 08:00 Does the concentration in equity markets and the increasing value of the Magnificent Seven require you to adjust valuation models for small caps? 09:30 The small cap discount to large caps has reached quite an extreme by historical standards 11:30 More clarity on the direction of rates would help small caps 13:30 There is an opinion that if rates stay higher for longer, then that would be bad for small caps. That is something we fundamentally disagree with. 14:00 The consensus view that small caps have underperformed as rates have gone up, that just hasn't been true versus history 18:00 About 30 per cent of small cap companies in the US has had a negative EPS over the last two calendar years 20:00 The two catalysts for small caps: clarity on rates environment and confidence in business cycle 23:00 Are the future small caps all about AI? 26:00 Examples of AI small caps; filling in doctor's insurance papers 36:00 Healthcare, REITs and the dangers of playing the sector game 41:00 Examples of what not to invest in: the case of an Italian industrial company 43:00 Fuzzy panda, short-selling and meme stocks 45:00 Is there a small cap premium in the Australian market? Maybe, but JB Hifi has been one of our strongest performers Full Transcription of Episode 119 Wouter Klijn 00:00 In this episode of the [i3] Podcast, I'm speaking with Richard Brown, who is a Client Portfolio Manager with Janus Henderson Investors. And today we are going to talk about global small caps. We look at whether small caps are affected by the increasing concentration of the equity markets, particularly in the US, where technology stocks have dominated returns in recent years. We talk about catalysts for unlocking the current small cap discount versus large caps, including the rate environment and the current business cycle. And we take a look at a few case studies of where to invest and where not, involving fuzzy pandas, Italian industrial stocks and JB Hi Fi. This episode was sponsored by Janus Henderson Investors, and as such, the sponsor can make suggestions for topics, but the final control remains with the Investment Innovation Institute. Richard, welcome to the podcast. Richard Brown 02:10 Hi Wouter. Thank you. Delighted to be here. Wouter Klijn 02:14 So why small caps? How did you get involved in this particular area of investment? Richard Brown 02:18 Look, I think small cap is one of the most interesting areas you can be involved in, in capital markets, in truth, huge inefficiencies available for active stock pickers. You know that can certainly peak at peak interest. But you also end up looking at some very bizarre and unusual areas of the market. You know, egg producers, other companies working in particularly niche areas of the market. And you know that that that sort of area of small cap has always sort of piqued my interest and draw me to this area within within investment. So, yeah, I've been working with in the equity market since 2010 and really for the vast majority of that time, it's been with a focus on the small cap area. Wouter Klijn 03:00 So is there a current investment egg produces? Richard Brown 03:04 Well, actually, after a long standing investment there, we've actually had to just take profit after we saw some very strong returns driven by a strong pricing environment that states on the back of an outbreak of bird flu over there. But so I was quite sad to leave that investment, but it was a good one to us. So that's a good reason to be selling a stock. Wouter Klijn 03:24 Yeah, it would be interesting doing due diligence on a company like that, but maybe we can bring it a little bit to a higher level the current environment for small caps. I mean, I think markets are in a very interesting ...