Morgan Stanley today writes that Europe-targeted exchange traded funds are underweight large caps and overweight small and mid-cap companies. We are guilty of the same bias, mainly because I think we are more likely to hit a home run with a stock others are not piling into for analysis or investing.
But while StarMine data shows that Q1 results at small and microcap companies have missed estimates 56% of the time, large companies in Q1 were 52% likely to match or beat estimated earnings. They are better covered and they massage expectations better, to be sure, but they also gain because they have more financial clout than the little guys.
Overall, MS says, you should buy companies growing faster than the broad market while sporting a lower price-earnings ratio. An example would be BASF, which we sold because it lacks access to cheap gas for its petrochemical plants compared to US rivals. I am not sure I am convinced.
MS says that in the present low-inflation, low-growth economic environment, large caps should be gainers because they offer attractive yields. Moreover, they are sitting on cash piles they may put to work with acquisitions. That counts as a word from our sponsors, of course, since investment banks like MS make money by advising companies on mergers and acquisitions.
Still, I am taking a few steps to increase the size of our portfolio holding companies.
More follows including a stock holding switch today, and news from Canada, Spain, Sweden, China, Colombia, Mexico, Brazil, Britain, and Ireland.
*Bank of Nova Scotia is buying up the 40% of shares it doesn’t now own in Aurion Capital from the employees for an undisclosed amount which is “not material”. It is thereby expanding its in-house asset management business. My belief is that this is only a 1st step. BNS also owns 36.8% of C.I. Financial Corp., one of Canada’s largest investment fund manager companies. I expect CIX-TSE, which also trades in the US as CIFAF, is likely to also become a target for its parent. currently the highly profitable wealth management firm is not consolidated in BNS accounts. It trades at a p/e ratio of nearly 20x expected 2014 earnings, in part because it is growing fast, and in part because it is expected to be taken over by its Halifax-based parent bank.
CIFAF is expected to earn C$1.81/sh in 2014 according to The Investment Reporter (of Canada) which is 20.7% higher than its profit/sh last year. So its growth can justify its high price. In 2015 its earnings are expected to hit C$2.15. The fast growth is because Canada’s population is aging (like ours) and there is increased need for wealth management services. That is also why I expect BNS to snatch CIFAF. Note that this fast growth is recent and its average over the past 5 years was ony 12.4%.
