Trends Watch: Global Small and Mid-Cap Equity Securities

EisnerAmper’s Trends Watch is a weekly entry to our Alternative Investments Intelligence blog, featuring the views and insights of executives from alternative investment firms. If you’re interested in being featured, please contact Elana Margulies-Snyderman.  

This week, Elana talks with Dan Barker, Managing Partner & Portfolio Manager, Apis Capital.

What is your outlook for alternative investments?

We believe the outlook for alternative investments remains strong.  Alternative investments will always provide a way for investors to add both alpha and diversification to their traditional portfolios.  While the past year has been challenging, to say the least, the industry was able to show its adaptability and resiliency and, even more importantly, its ability to generate strong returns for investors.  While the allocation and investment processes for both investors and hedge fund managers were derailed by all types of restrictions (e.g., travel, social/in-person meetings, conferences, etc.), the transition to the remote work environment was executed fairly quickly and efficiently.  As we found throughout 2020, COVID-19 also accelerated some trends that have been ongoing for some time and provided tremendous opportunities for us on both the long and short side of our portfolios.

Where do you see the greatest opportunities and why?

Our focus is in long/short and long-only global small and mid-cap (SMID-cap) equities which has been mostly overshadowed by the run up in large-cap/mega-cap technology stocks the past few years.  That’s a great opportunity for us because we’re able to find all kinds of compelling stocks to buy at very reasonable, if not downright cheap, valuations.  One area that has been exciting is in the “green commodities” industries.  There are several commodities that are needed to enable the “greening” and “electrification” we’re witnessing all around us in things like reduced emissions or electric vehicles.   One example of an enabling commodity that is in short supply is palladium.  This metal is mined in only a few places in the world and is primarily used in catalytic converters in automobiles.  It is the only way to effectively reduce certain types of automobile emissions.  Countries such as China are enforcing evermore strict emissions hurdles which are requiring increasing amounts of palladium.  Among the handful of beneficiaries is Sylvania Platinum in South Africa which trades at just a fraction of the market’s valuation and pays a handsome dividend.  Numerous other metals such as neodymium, praesidium, vanadium, rhodium, cobalt, and nickel are also in short supply because of the increased push to clean the environment.  These are commodities that have seen very little investment over the past 15 years and will have a difficult time meeting demand.  Sylvania is just one of several equity investments we have in this theme.

What are the greatest challenges you face and why?

Our challenge has always been that our strategy tends to be tedious and labor intensive.  The companies we look at are small and located across numerous time zones, languages, exchanges, and market norms, so there’s a wide variety of considerations.  The difficulty in doing this is largely why we stand alone in executing this strategy.  We firmly believe that it is essential to turn over as many rocks as possible to find the most compelling ideas; however, this approach takes time and considerable effort.  We have spent decades building our expertise, having met with thousands of small companies around the world, building financial models, interviewing management teams, analyzing the industries, etc.   The silver lining is that this challenge is what keeps competitors at bay and makes our strategy unique.  

What keeps you up at night?

The developed world is embracing a very extreme and deliberate monetary policy with an unprecedented increase in the supply of money.  There are only a few historical precedents to observe, but they generally don’t end well as some combination of asset bubbles and inflation usually result.  No one really knows how this current experiment will end and what the impact will be on the broader economy long-term.  The upside to this is that volatile macro environments can often create spectacular investment opportunities in the global equity markets especially for fundamental investors like us who have a deep understanding of their companies. 

The views and opinions expressed above are of the interviewee only, and do not/are not intended to reflect the views of EisnerAmper.