The following article was written originally for CNBC as a follow up to an interview that I appeared in yesterday morning.
There has been enormous growth over the last decade in ETFs and specialist funds to service growing investment demand for exposure to global macro trends. Investors can buy collective investments that track commodities, global sectors and emerging markets at the click of a mouse. But in buying these funds, while diversifying their risk, investors are necessarily buying sector average valuations and paying management fees that hinder their long term returns. Most investors would agree that markets are in general fairly efficient begging the question of where diversified ETF investors are going to find their alpha?
The small cap sector of the market has been greatly ignored over the last 2 decades, indeed a recent study by Gartmore showed that there had been net outflows from smaller company funds every year over the first decade of this millennium. But there are 2000 or so companies listed in the UK market outside of the FTSE 350 and many have extremely strong core franchises, asset backing or recurring earnings, and as so much capital has flowed out of the sector, there are still many good value situations.
Given the above statements, I'd like to give some examples of companies we've recently interviewed that illustrate how investors might gain exposure to some macro investing themes while potentially taking advantage of the small cap discount. The themes in question are the surging Gold price, the ongoing stress on the banking system and emerging market growth.
Reaping Profits from Gold: H&T Group (LON:HAT) is one of the UKs leading pawnbrokers which has proven to be a genuine growth area over the last 20 years. H&T has grown its high street pawnbroking chain to more than 135 stores and consistently grown revenues and earnings at high returns on capital. John Nichols and the management team noticed the booming gold price and acted very quickly to set up 'pop up' Gold Bars in high street shopping malls. This gold purchasing operation has reaped enormous profits for the group, and while no doubt unsustainable over the long term, the cashflow generated is enabling the group to pay down their debt and invest more quickly into their core business of pawnbroking. The company trades on a p/e of under 7 times…
