A study by the renowned economists Eugene Fama of the University of Chicago and Kenneth French from Dartmouth College has shown that, over the past 80 years, investments in undervalued second-tier stock (small caps value) have offered the greatest returns.
Imagine you have €1,000. How would you best invest it? In a fund that invests selectively in small and medium-sized enterprises. The analysis by economists Fama and French leaves no room for doubt. If in 1926 you had invested €1,000 in small cap value stocks, as the Delta Lloyd L European Participation fund does, by the year 2009 you would have earned over €31.5 million from your investment. On the other hand, an investment in blue chip companies would have only given you a return of €2 million over the same period.
How is that possible?
The majority of investors work on the assumption that all the information available about a company is reflected in its share price. But that’s not always the case. Only few investors take the time to look into a small company in depth. Investors who invest in second-tier stocks do this, and they therefore often find that a company’s low share price does not reflect its intrinsic value.
The managers of the Delta Lloyd L European Participation fund not only research these companies in detail, but also build up a relationship with them through regular visits. Using this concept we are in a better position to accurately estimate the company’s value. The potential benefit of this work is significant. The fund managers buy shares in a company at an attractive low price, confident in an above-average long-term return.
Why doesn’t everyone invest in small cap values?
Fama and French published their findings on second-tier stocks for the first time over 17 years ago. However, 85% of investors still concentrate on growth, rather than the value of a business. “Investors as a rule follow the crowd”, explains Angus Steel, one of the Delta Lloyd L European Participation fund managers.
Steel illustrates his point with the example of a networking dinner of prominent financiers that took place in London in the year 2000, at the time of the technology boom. “Conversation at the table was centred on the question of how long the virtually explosive rate of growth would continue. Despite all their doubts, no one thought to get out before the bubble burst. Why not? The usual answer was: “I can’t accept a lower performance than the rest of the market this month.”
Above-average results
For investors investing in small cap value, temporarily achieving lower returns than the rest of the market is not a problem. Fama and French go as far as to say that it’s a part of it. Steel says: “Taking the long view, this is exactly the way to generate above-average profits.”
Read more about Delta Lloyd Asset Management and Delta Lloyd funds at: www.deltalloydassetmanagement.de
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For further information:
Martina Fassbender
Telephone: 0611 773 25 71
E-mail: martina.fassbender@deltalloyd.de
Notes to editors:
About Delta Lloyd Asset Management:
Delta Lloyd Asset Management (DLAM) is the independent asset manager within the Delta Lloyd Group, one of the leading providers of financial services in the Netherlands. As well as the Delta Lloyd public funds, the investment company also manages investment mandates for the Delta Lloyd Group and external institutional investors. Its many years of experience also benefit the German market, where the company offers innovative and proven investment funds with a successful “boutique” approach. With assets of €43.5 billion (as at 30 June 2009) under management for internal and external customers, DLAM is the fifth-largest asset manager in the Netherlands.
DLAM follows a long-term investment approach with three priorities. Bonds, thematic funds and participation funds which invest in undervalued European small and mid caps on a partnership basis. In this way, DLAM has found its niche and sets trends, instead of following them. DLAM is represented on the German market with the Delta Lloyd L Bond Euro fund and the Delta Lloyd L Water & Climate fund, as well as seven other SICAV funds including the Delta Lloyd L New Energy fund. Marketing in Germany is carried out by Delta Lloyd Asset Management Vertriebs GmbH, whose managing director is Rik Verhoeven.
About Delta Lloyd Germany:
Delta Lloyd Germany is a 100% subsidiary of the Delta Lloyd Group, Amsterdam, and therefore part of the British Aviva Group. The company offers a one-stop shop for a wide range of financial, investment and provident products and also provides expert advice on all financial matters. Along with the Delta Lloyd Leben and Hamburger Leben life insurance companies, the Delta Lloyd Group in Germany is made up of a pension fund and a consultancy company for company pension schemes, as well a bank focussing on private banking, and a property financing brokerage.