CIO picks out areas – including Israel - where investors can benefit and outperform large funds
Innovative companies with market capitalization below $1 billion are too small for many large funds. It’s a missed opportunity, with many of these firms representing major opportunities for growth.
Gerry Frigon, president and chief investment officer at Taylor Frigon Capital Management, believes, that small- to mid-cap funds in the US are one of three excellent opportunities for investors in 2020.
He told WP that a fund with $10 billion in assets under management can’t invest 1% in the stock of a company with a market capitalization of $100 million without buying that company completely, or in a company with a market capitalization of $200 million without buying half of the entire company.
He added: “Most investors will also understand that putting less than 1% of a portfolio into a company is not really very productive: if that company turns out to be a real winner, it won't create very much gain if the portfolio only has half of a per cent allocated to that company.”
In fact, out of the roughly 4,000 publicly-traded companies in the US listed on the major exchanges, more than 2,300 of them have market capitalizations below $1 billion, and over 2,700 have market capitalizations below $2 billion.
“To make matters worse for large funds, many of the biggest opportunities for growth will be found in companies with smaller market capitalizations,” Frigon said. “Investment options diminish as an investment strategy gets bigger, as does the speed with which the strategy can buy or sell an investment position.
“For some investment goals, investing in funds with fewer assets under management can offer greater opportunity.”
The second major opportunity Frigon highlighted for investors was Israel, pointing out that every major US technology company, and increasingly US-based bio-pharma companies, have research and development centres in the country.
According to the CIO, there is one start-up for every 1,200 people in Israel and the country ranks number one in terms of VC investment per capita. Intel’s flagship x86 microchip was designed in their Haifa design centre in the 1970s and since then, myriad companies have opened operations in Israel to be close to the “action”.
Frigon said: “Israelis have proven themselves to be amazingly adept at innovation. We would go so far as to suggest that it may have become even more important than Silicon Valley in that regard. The Valley has become enamoured with the ‘app economy’ and ‘green technology’ since the dot.com blow-up, which is not of interest to us.
“Israel is exploring the cutting edge in what we call ‘core technology’ and is crucial in the proliferation of technological advancement. Israeli companies almost ubiquitously trade on NASDAQ; it is no different to us than making an investment in a US company.”
The final area where investors can reap rewards is maybe a more familiar one to many – high-growth tech companies. These “fertile fields” of future growth are largely in technology companies “virtualizing” those tasks which used to be done with hardware; building microchips that allow for much longer battery life; creating and allowing us to experience virtual and augmented reality; and using new methods to secure networks from cyber-attacks.
“Distributed-ledger computing and blockchain are still emerging but we believe these technologies also promise to transform computing in the coming decade.” Frigon added.
“Fertile fields are also found in medical technology where new ways of discovering drugs utilizing artificial intelligence, genomics, and re-programming DNA are driving great progress in treatment of diseases. And they are in medical device breakthroughs in the treatment of cancer and eye diseases.”