Impact investing: time for small and mid-cap stocks to shine

Go smaller for better upside says Regnan’s head of impact investing, TIM CROCKFORD

• Era of easy beta-fuelled returns is over
• Opportunity with over-sold small and mid caps
• Find out about Regnan Global Equity Impact Solutions Fund

WE can debate whether the era of easy money is over.

But there is less doubt that the era of large-cap, beta-driven, passive investing is over, says Regnan’s head of impact investing, Tim Crockford.

Investors should now consider small-and-medium companies where valuations are more appealing than large caps, says Tim Crockford, who manages Regnan Global Equity Impact Solutions Fund.

The last two years suggest that markets may remain volatile for some time to come and sector rotation away from “yesterday’s leaders” merits a more nuanced, active approach, he says.

The 2024 price-earnings ratio for MSCI World SMID Cap Index – which tracks performance of small and medium companies in developed markets – is estimated at 14.2x, says Crockford.

That compares to an estimation of 15.7x for the MSCI World Large Cap index – despite expected year-over-year earnings growth rates of 11% and 7.6% respectively. 

“Over the long-term, small caps have been a powerful driver of returns because they typically grow their earnings much faster than large caps,” Crockford says.

“Over the last decade portfolios have been under-exposed to these companies, so now there’s an opportunity to re-balance.”

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Regnan Global Equity Impact Solutions Fund

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The “impact investing” space

Crockford’s four-person impact investing team looks for innovation and impact in the small and mid-cap space.

“They’re the companies that can help solve real-world problems with innovative solutions. They’re likely to be winners in decades to come as demand grows for solutions to big problems like the SDGs.”

SDGs refers to 17 “Sustainable Development Goals” identified by the United Nations as requiring urgent global action.

“We look for small and mid-sized companies that sit at the intersection of impact, innovation and investability.

“It’s important to think in decades not in quarters, and build high conviction positions in a small group of companies that have the potential to make an impact on pressing environmental and social challenges through innovative solutions.”

The return of active management provides an opportunity for investors to rethink their exposure to these kind of companies as general stock market returns slow, relative to those earned in the last decade, Crockford adds.

“Capital markets are starting to discriminate again, because capital has become concentrated in a narrow area within the broader market,” he says. “Sixty-one per cent of active managers outperformed the S&P500 in 2022.”

“Small-and-medium companies are trading at very appealing valuations versus large caps and represent a significant underweight in portfolios.

“While last year was tough for investors, growth stocks were sold off more than other areas of the market.

“Some of the selling was indiscriminate and irrational.

“While valuations have come down, for the right companies, fundamentals remain intact.

”Long-term growth expectations for some companies exposed to these transformational themes are too conservative.”

About Tim Crockford

Tim Crockford leads Regnan’s Equity Impact Solutions team and is senior fund manager of Regnan Global Equity Impact Solutions Fund. Tim previously managed the Hermes Impact Opportunities Equity Fund after co-founding the Hermes impact team in 2016.