Small Cap Europe (MMS) : “Mind the Gap”

The ETF MMS (Lyxor), listed in Euro, replicates the UCIT Small Cap Europe Index, which targets Eurozone companies whose market capitalization is between € 200 and € 1500m, ie companies that are ultimately more medium in size than microstructures.

The ETF charges are 0.4%, and the replication mode is indirect (via swaps), with a reasonable AUM of approximately 362M€. The dividend distribution policy is carried out by distribution.

 Alternative ETF: IEIS ( iShares USD), SMAE (Lyxor EUR)

 

Latest developments

The MMS ETF rose by 21.9% in 2017, which is more than twice the performance of the Stoxx600NR (+ 10.6%) and is slightly negative in 2018 (-1.9%).

Growth companies, especially those part of the technology segment, have been impacted by the US correction, in the wake of the GAFAs in particular Facebook and Amazon. This correction seems to be coming to an end which requires confirmation.

In the industrial sector (industry and materials), the large operating leverage of medium-sized companies should ensure a new round of rising profits while demand and investment tend to strengthen, including in France and Italy. As a result, the average EPS growth rate should again be higher than that of the larger Stoxx600NR stocks, which are particularly exposed to currency fluctuations and geopolitical issues that may impact a particular region.

In addition, the absence of banks that have underperformed the benchmark for a few weeks is currently a good thing.

 

Index & components

The index replicated by the ETF includes 479 companies with wide sectoral and geographic diversification which makes it a broad and very diversified index.

The specific risk is low because the first 10 lines represent approximately 10.2% of the fund, or about 1.5% for the most important lines, including iconic growth stocks such as Moncler, Rheinmetall or Orpea. The major economies (Germany, France and Italy) account for 54% of the selection, leaving a significant share for the Nordic economies such as Finland or the Benelux.

The Small Cap ETF represents an opportunity to play the growth of the euro area with a risk even below the benchmark index (stoxx600) - due to the absence of large banks - a policy of dividend distribution and with a much more assumed growth profile. Indeed, sectors considered defensive-telecoms, basic consumption, utilities and energy represent only 13% of the MSCI Small caps index, while growth sectors (Technology / Hardware, Consumer Discretionary , health) represent about 1/3 of the index, the first sector remains the industry with nearly 21% of the capitalization.

It should also be noted that unlike the Stoxx600, the United Kingdom is not part of the selection, MMS is therefore only focused on continental Europe and therefore there is no currency problem. We believe that the Eurozone is attractive in the medium term as the economic recovery is confirmed (+2.1% in 2018e), supported by rather low interest rates and energy costs, while the political cycle is completed.

Although valuations of growth stocks are still fairly demanding, and a temporary return to "value" cannot be ruled out, new technologies and new economic models, particularly those resulting from digitization, make this theme a " megatrend ". The long-term potential is clearly in favor of growth stocks ​​and MMS which also includes industrial stocks ​​seems to us to represent an excellent risk / reward ratio in a long-term perspective with a positioning more advantageous than the stoxx600.