MQ launches Chinese small-cap quant fund
ôSmall caps have been unloved for too long,ö says Nick Thompson, head of non-flow structured products at Macquarie.
Macquarie is introducing a China small-cap product for retail investors. The MQ China New Stars Fund invests in 200-300 overseas-listed Chinese stocks with market capitalization in the range of $100-750 million. 75% of this portfolio will be invested outside of China, including Hong Kong, Singapore, Taiwan, UK and the US, while another 25% will be dedicated on small cap IPOs and newly listed securities.
ôSmall caps have been unloved for too long,ö says Nick Thompson, head of non-flow structured products at Macquarie. ôThey have been historically under-researched. What we are looking to do is to really extend the types of product that have been delivered to the retail space to give them more choiceö
He says the new fund will make quantitative investment strategies previously limited only to institutional investors available to retail investors. It will also expand product choices available under the Greater China category that have been traditionally focused on large caps and index movers.
By trading quantitatively, it does not rely on fund managersÆ input for investment ideas. Instead, the MQ system regularly screens and ranks valuation of these small caps stocks in the market, and compare these with the individual stocksÆ price movements, or æmomentumÆ.
ôThe beauty of systematic processes is that we are at lower risk of falling in love with one particular sector at particular time,ö Thompson says, ôWe are looking at extracting value but not value in isolation but value with momentum. And we are doing it across a specified segment of the market, irrespective of sector.ö
The universe of small caps is growing. According to MacquarieÆs in-house research, 40 million small- and medium-sized enterprises (SMEs) have been established in China between 1997 and 2007. These companies now account for 69% of all Chinese exports. In Asia's capital markets, the number of listed small caps is also shooting up. From 2000 to 2007, it has increased by 37%; in Hong Kong by 130%; Singapore 57%; China 585%, although in North America and Europe, it has dropped by 5% and 13% respectively.
The majority of AsiaÆs small-cap stocks are under-researched, with fewer than four analysts following any given name, versus an average of 11 analysts covering most large-cap stocks, according to IBES (Institutional Brokers Estimates System).
Small caps in Asia are usually cheap û a stark contrast to China A shares (trading on average around 50x earnings) and, at least until this weekÆs correction, H shares. Some 42% of Singapore-listed small-cap China plays, in contrast, trade around 10x, and another 34% of them trade between 10-20x earnings. The majority of Hong Kong small caps trade below 20x.
But is there a reason why small caps are so cheap û are these in fact perennial underperformers? The evidence says no. The Hang Seng Index has risen sevenfold over the past 20 years, but Hong Kong small caps in the same period have seen their values rise 31 times.
The rewards seem handsome but investors will have to pay for the privilege, as this fund is expensive for a long-only product, charging a 10% performance fee above a 5% annual high watermark on top of a 5% front-end load and a 1.5% annual management fee.
ôSmall caps have been unloved for too long,ö says Nick Thompson, head of non-flow structured products at Macquarie. ôThey have been historically under-researched. What we are looking to do is to really extend the types of product that have been delivered to the retail space to give them more choiceö
He says the new fund will make quantitative investment strategies previously limited only to institutional investors available to retail investors. It will also expand product choices available under the Greater China category that have been traditionally focused on large caps and index movers.
By trading quantitatively, it does not rely on fund managersÆ input for investment ideas. Instead, the MQ system regularly screens and ranks valuation of these small caps stocks in the market, and compare these with the individual stocksÆ price movements, or æmomentumÆ.
ôThe beauty of systematic processes is that we are at lower risk of falling in love with one particular sector at particular time,ö Thompson says, ôWe are looking at extracting value but not value in isolation but value with momentum. And we are doing it across a specified segment of the market, irrespective of sector.ö
The universe of small caps is growing. According to MacquarieÆs in-house research, 40 million small- and medium-sized enterprises (SMEs) have been established in China between 1997 and 2007. These companies now account for 69% of all Chinese exports. In Asia's capital markets, the number of listed small caps is also shooting up. From 2000 to 2007, it has increased by 37%; in Hong Kong by 130%; Singapore 57%; China 585%, although in North America and Europe, it has dropped by 5% and 13% respectively.
The majority of AsiaÆs small-cap stocks are under-researched, with fewer than four analysts following any given name, versus an average of 11 analysts covering most large-cap stocks, according to IBES (Institutional Brokers Estimates System).
Small caps in Asia are usually cheap û a stark contrast to China A shares (trading on average around 50x earnings) and, at least until this weekÆs correction, H shares. Some 42% of Singapore-listed small-cap China plays, in contrast, trade around 10x, and another 34% of them trade between 10-20x earnings. The majority of Hong Kong small caps trade below 20x.
But is there a reason why small caps are so cheap û are these in fact perennial underperformers? The evidence says no. The Hang Seng Index has risen sevenfold over the past 20 years, but Hong Kong small caps in the same period have seen their values rise 31 times.
The rewards seem handsome but investors will have to pay for the privilege, as this fund is expensive for a long-only product, charging a 10% performance fee above a 5% annual high watermark on top of a 5% front-end load and a 1.5% annual management fee.
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