- S&P Small Cap 600 (USA)
- EURO STOXX Small (Europe)
- MSCI Japan Small Cap
- MSCI AC Far East Ex Japan Small Cap
- MSCI Emerging Markets
Valuation
To value small cap funds we need to make some adjustments to the model.
Growth Rate: The growth rate for small cap stocks is higher than large caps. If you remember for large cap stocks we took real GDP growth forecasts for the country or region and reduced it by 50% and added an inflation expectation to give a nominal growth rate. We can use the same idea here but we will add a small cap premium of 0.75%. This will be a conservative premium of the annual growth rate of small cap stocks over large cap stocks. Historically this number has been higher than this but to keep our estimates conservative and to give us some margin of safety a 0.75% premium will be sufficient.
Adjustment Rate: For most ETFs we used 4.5% as a fair value dividend yield. For small cap funds we will say that a 4% dividend yield is fair (small cap stocks traditionally have higher growth rates so their dividend yields are lower due to the market pricing for the growth and also companies retaining a high proportion of their earning to continue to expand their businesses). Again emerging markets get a 0.25% reduction (making a 3.75% fair yield) due to higher growth potential.
The Data
The table below shows the data used to value the 5 funds:
Region
|
Ticker
|
Price
|
Net Yield
|
TER
|
Adjustment
|
Growth
|
Total Return
|
FE(ex Jpn)
|
ISFE.L
|
1529
|
2.49%
|
0.74%
|
-1.06%
|
6.10%
|
7.53%
|
EM
|
IEMS.L
|
5794
|
2.21%
|
0.74%
|
-1.19%
|
6.18%
|
7.20%
|
Europe
|
DJSC.L
|
1604
|
2.95%
|
0.40%
|
-0.88%
|
3.40%
|
5.47%
|
Japan
|
ISJP.L
|
1429
|
1.94%
|
0.59%
|
-2.26%
|
4.18%
|
3.86%
|
USA
|
ISP6.L
|
1847
|
0.87%
|
0.40%
|
-5.57%
|
4.43%
|
-0.27%
|
Two of the funds look worthy of a closer look: Far East ex Japan with an expected return of 7.53% and Emerging Markets Small Cap with an expected return of 7.20%.
ISFE
The chart below shows recent price action for ISFE. You can see it's fairly stable and trading above its 100 day low line which looks to be a good support area at present. Positive price action shows the 100 day high line being broken on the upside at the beginning of the year:
IEMS
A chart for the same period. Similar chart pattern as you would expect due to the high correlation of the holdings. A minor breach of the 100 day low shows weaker price action than the Far East fund:
In summary the Far East fund looks a better opportunity. A higher expected return and current dividend yield and stronger price action.
No comments:
Post a Comment