When I read Mark Uptigrove’s post “Why size matters”, I thought it was a good chance to follow up with my thoughts about small-caps. Mark wrote about the mid-cap bias that he and Clayton tend toward and a lot of the points he touched on relate to the investing space I inhabit.
My colleague Virginia likes to say small-caps are like a stockpicker’s Disneyland. I can really relate to this. I recently visited Disneyland with my family and at the end of the week I jokingly asked my kids which they preferred – Disney or Canada’s Wonderland (a theme park near Toronto). Okay, it was a pretty lame joke, but they’re five and eight so I got a good laugh and they, of course, picked Disney. Why? It has more parks and within each park are more rides, more options.
From a portfolio management perspective, the small-cap universe has similar features – greater quantity, more variety, better quality. In the investment world, these are your friend and we draw on this structural advantage, this bigger pond to fish in.
There are three enduring traits of small-cap companies:
- They have greater growth prospects.
- They are under-followed, overlooked.
- They’re more nimble. They’re not plagued by layers of bureaucracy. There’s no culture of inertia. They’re able to adapt more quickly to the environment around them and change/alter course when needed.
Advisors and investors I meet always ask for specific examples. So, to illustrate the bullets above, let me tell you about Tempur-Pedic. This is a company that makes high-end memory foam pillows and mattresses. They were consistently getting feedback that their mattress was a little too hard. So, they came out with a softer mattress and their market doubled in size.
I’m not over simplifying this. They softened up their mattress and all of a sudden twice as many people started looking at it and an already growing company exploded. The stock just took off. That’s the benefit of being small and doing something that has big results.*
So, with small-caps you’ve got more breadth of businesses to choose from plus all these other benefits. In general, I think the way we manage money is a good marriage with the small-cap world. It is tailor-made for Trimark.
*By the end of May 2011, the Trimark Small-Cap equities team had liquidated its entire position in Tempur-Pedic due to elevated valuations. The team continues to monitor the company.
Learn more about the Trimark Investments team.