LIBERUM OPINION: Sebastian Jory, Liberum Strategy Analyst
Email Seb or call him on: +44 (0) 20 3100 2192
It’s well documented in academia that smaller companies tend to perform better over time horizons of 10 years or more. This is particularly evident in the UK, where we see good performance from the very smallest companies and bad performance from the very largest companies.
£100 invested in the FTSE 250 on January 1st 1997 would be worth £593 now.
By comparison, the FTSE 100 would have returned just £287.
This is largely down to the FTSE 100 being dominated by around 20 very large firms - the megacaps - which have historically been mostly Banking, Mining, Oil & Gas and Telecoms companies. The performance of the megacaps since 1997 has been relatively weak, offsetting the much stronger performance of the 80 smaller firms in the FTSE 100 and holding back the index.
This chart shows the return on £100 since 1997 from UK indices.
One key reason why smaller companies tend to generate better returns in the long term is the existence of a ‘liquidity discount’ that evaporates as they grow into larger businesses.
Institutional investors are willing to pay a higher price for a stock, all else being equal, if they can enter and exit positions quickly and without moving the market. This translates into broadly higher multiples (P/E EV / EBITDA etc.) on larger companies for a given level of earnings growth.
This effect has been particularly exaggerated of late. Not only has liquidity in small cap worsened markedly over the last 12-18 months, but the premium investors are willing to pay for liquidity has risen – likely a result of the 'lobster pot’ rotation out of small cap witnessed in April-June last year which left small cap ‘tourists’ particularly scarred.
This chart shows the number of days it takes to trade 10% of a stock.
We therefore find the FTSE Small Cap index currently at a post-crisis record discount to the FTSE 100. It is trading, as a whole, on 13.2x 12m fwd P/E vs. the FTSE 100 on 15.8x – a 17% discount. We can expect this to normalise, as it has done in the past, if liquidity improves or if risk appetite for illiquid companies returns.
Another key factor cited by academics for small cap outperformance is the increased likelihood of mispriced securities in small cap, given lower analyst coverage. One key caveat to this is that whilst there may be more mispriced securities in small cap, there are a similar number overpriced as underpriced.
The overpriced securities typically trade on a high multiple as a result of optimistic growth expectations, which often prove too enthusiastic. We find that expensive (cheap) stocks typically underperform (outperform) more in small cap than in large cap, where securities are more efficiently priced, for precisely this reason.
Therefore, when investing in small cap we should be careful to maintain a value ‘tilt’, an approach first characterised by David Swensen of Yale University.
LIBERUM OPINION: Ian Whittaker, Liberum Media Analyst
Email Ian or call him on: +44 (0) 20 3100 2089
FEW north of Crouch End will be surprised to know that there is a massive gulf between how the British consume television and use their iPads and what London’s media elite think they’re doing.
And that leads to some warped views of what’s actually going on.
London media execs are as likely to visit the moon as Barnsley and believe the ‘provinces’ to be populated by red-trousered "Kippers".
They are also sure that they understand the habits of the rest of the country because their teenage children spend every waking hour on Snapchat and FaceBook, with zero interest in Coronation Street.
I was reminded of this confirmation bias when I looked at a fascinating survey by Thinkbox, which probed the media habits of the media elite and the normal - my emphasis - population.
Your average metropolitan media luvvie assumes that Joe Public watches 1 hour and 43 minutes of live TV a day and that only 49% of all TV viewing is live.
In fact, it’s 4 hours and 12 minutes and 89% (the figures are from 2013 but unlikely to have changed significantly).
We are watching as much live TV now as we did 10 years ago.
Elsewhere, nearly four-fifths of the media elite use Twitter compared with the rest of the population at less than 20%.
Now it’s true that Thinkbox has skin in the game here as it is the trade body for the commercial TV broadcasters in the UK.
But its findings are important for two reasons.
First, it suggests that the agencies' insistence on the relentless rise of digital and the need to shift advertising budgets away from TV to online is premature. Linear TV may be around for a lot longer than people expect (in the U.S. it remains by far the dominant form of video viewing).
A statistic often missed is that while live TV viewing in the UK may be down from 2010, it is almost exactly the same as it was a decade ago, which suggests that the fall from recent years may be a reversal of the spike in live TV viewing we saw during the recession.
Second, advertisers risk shifting their budgets prematurely into a medium that is unproven and where there are major issues around fraud and transparency of pricing.
It is almost a mantra amongst some advertisers to talk of the amount of money they are shifting to digital/online and that being digital automatically boosts sales. That is wrong.
The key question is what works. On that score, linear TV has a future.
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LIBERUM OPINION: Ian Whittaker, Liberum Media Analyst
Email Ian or call him on: +44 (0) 20 3100 2089
Commercial factors will, I believe, force the UK’s broadcasters to give up their provocation to use an empty chair where an absent David Cameron should sit in the televised election debates.
For the BBC, the obvious risk is over Royal Charter renewal and the structure of the licence fee. The bulk of the Conservative party and press already thinks the Corporation is a hotbed of metropolitan, Oxbridge lefties who hate Tories.
Assume the Conservatives form the next government. In a bid to quell restive backbenchers in the run-up to a divisive and challenging EU referendum in 2017, the government may throw them a BBC bone.
Less commented on, though, is the risk for the commercial broadcasters.
The government has just launched a review into whether the main commercial channels (ITV, Channel 4 and Five) can charge pay-TV operators for carriage of their channels. This may be a huge and very profitable source of new revenues for the broadcasters and a major cost for operators such as Sky.
So for the commercial broadcasters to empty-chair Cameron risks their positions in this debate.
The Conservatives would, of course, claim that whatever decision is taken was impartial.
But Archie Norman, ITV's Chairman and ex-Conservative Party Chairman, has the sufficient political nous to know the risks.
Channel 4's bosses, meanwhile, would have the extra consideration of fuelling what it would see as an unwelcome privatisation debate.
But the broadcasters are standing together on this issue, no?
Well, the platforms tend not to sacrifice their own interests for the greater good (ITV CEO Adam Crozier recently blamed its weak performance in audience share partly on the BBC).
There is too much temptation for one broadcaster to break ranks.
There will be two other considerations for the broadcasters.
First, the Conservatives look to be edging into a sustained lead (ahead by 2 percentage points with YouGov this week) as Labour's Scottish problem appears to worsen. Betting on the Conservatives winning the most seats has tightened considerably over the last 24 hours.
Second, no one really seems to care about the debates. It is seen as a typical media elite debate that ‘luvvies’ and political hacks relish yet no one in the real world gives a damn about. Lord Ashcroft's findings seem to support this.
The broadcasters will sound tough for a few days to save face and then back down, blaming the PM and/or voter apathy on the issue.
1-0 to Cameron
(LONDON) British householders have tempered their optimism on the outlook for property prices but continue to plan for house moves and improvements, Liberum’s lastest quarterly survey of UK consumers suggests.
“We’ve also highlighted sentiment ahead of the UK general election in May and it helps illustrate why the outcome remains so up in the air,” said Liberum Media Analyst Ian Whittaker, who leads the survey.
“The good news for the economy? Few are putting off their spending plans ahead of the election. And fewer people think they're the 'squeezed middle',” he noted.
Click on the image below to get PDF infographic
The survey, which has run for more than five years, highlighted support from potential voters for improved spending on care for the elderly and council housing.
The Brexit referendum outcome is finely balanced but Scotland must remain part of the UK, those polled across the country said.
Increased support for David Cameron as Prime Minster sharply outpaces that for Ed Miliband, with UKIP’s Nigel Farage markedly falling away compared with the previous survey.
Our poll, carried out in January, shows a wobble on overall confidence of the British consumer, with net positives as a percentage of all answers falling 3.3 percentage points to 6.6%, fuelled in part by concerns over job security and the softer property price trend.
By comparison, the average score in the 18 months to October 2014 was 11.6%.
“The January data feels like a blip to us given lower fuel costs and improving employment prospects,” Whittaker said.
1,003 respondents were asked their views in January/February 2015. The respondents were evenly distributed by gender (males: 49%, females: 51%), across age groups and throughout the social classes (A-B: 27%, C1-C2: 48% and D-E: 27%).
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