Untapped Growth Potential: Power of Small and Mid-Cap Investments with Unum and Integral

Unum Capital and Integral Asset Management have recently introduced two new investment opportunities called AMCs listed on the JSE and available to EasyEquities users in their ZAR wallet under ETNs. If you're wondering what AMCs are and whether they could be a wise investment for you, dive into this blog by Keith McLachlan, the Chief Investment Officer at Integral Asset Management.

Following regulatory changes at the JSE that paved the way for the JSE to list Actively Managed Certificates (AMCs), Unum Capital and Integral Asset Management have listed two unique AMCs that offer investors on the JSE unique access to underlying portfolios. 

Firstly, what is an AMC?

Simplistically, an AMC is the following setup with individual participants in bold:

• An issuer (normally a big bank) issues a note that they list on the JSE.
• The value of the note attaches to an underlying portfolio (i.e., Net Asset Value) that is managed by a portfolio manager as per a predefined mandate.
• Investors can buy and sell this note on the JSE, which shows up in the note as inflows or outflows of capital.

Thus, an AMC is a “structure” to house a portfolio for an investor to have a single entry point to invest and  for a portfolio manager to have a single place to manage multiple investors’ capital in a single pool. The issuer (i.e. bank) serves as the neutral third-party administrator of this structure and the JSE offers a central distribution platform for all the parties and their capital to meet.

Investors are quite familiar with Exchange Traded Funds (ETFs), so they could consider AMCs as “active” ETFs that do not necessarily track an index but, typically, do have some investment theme or differentiation.

With this background, the two AMCs that Unum and Integral listed on the JSE offer unique access to the underappreciated and underinvested small and mid-cap space, both domestically and globally.

Why small and mid-caps?

Two simple reasons: outperformance and diversification.

Firstly, small, and mid-caps tend to outperform their larger listed peers over the long term. This holds in the long term in almost all equity markets around the world, though it does come with more volatility in the short term.

Figure 1: Small Cap Indices versus Large Cap Indices (domestically & globally)

Source: Refinitiv (Datastream)

Secondly, while most equity markets have the bulk of their market capitalization (i.e., “size”) in the large caps on their bourses, the weight of the number of individual listed companies lies outside of them. For example, on the JSE, forty individual companies in the Top 40 Index collectively have c.85% of the JSE’s market cap. But, if you look beyond these, there are well over 150 small and mid-cap stocks on the JSE, i.e., two-thirds of all listed stocks on the JSE.

Thus, there are opportunities here that cannot be found in the large caps and can be used, cleverly, to diversify what are probably quite concentrated large-cap portfolios.

The two AMCs that Integral manages, and investors can invest in on the JSE are the following:

Unum Small / Mid Cap SA Equity Portfolio (JSE Code: UUSMC)

Built to always hold at least 80% of its portfolio in stocks outside of the JSE Top 40 but listed on the JSE, the UUSMC AMC offers investors unique exposure to domestic small and mid-cap stocks. The aim is to hold between 20 to 30 individual small and mid-cap counters, cognizant of achieving reasonable sectoral diversification and aims to select individual investments with a quality bias, cognizant of valuations and sensitive to growth and prospects.

At the time of writing this, UUSMC’s top ten holdings were:

Unum Global Small / Mid Cap Equity Portfolio (JSE Code: UUGSMC)

Much like the domestic-focused small/mid-cap AMC, the UUGSMC is built to always hold at least 80% of its portfolio in global small and mid-caps but this is no longer limited to the JSE-listed ones. Rather, the portfolio will seek to hold between 30 to 40 individual counters, aiming for reasonable sectoral and geographic diversification (though with a strong skew towards development economies and first-world exchanges) and aims to select individual investments with a quality-bias, cognizant of valuations and seeking out strong growth-orientated prospects.

At the time of writing this, UUGSMC’s ten holdings were:

These AMCs are market-made by UBS and can be invested in the JSE.

In closing, AMCs offer a great new way to trade via the JSE into a rich portfolio of actively managed instruments. They can offer some unique portfolios, such as the two small/mid-cap portfolios launched by Unum Capital and Integral Asset Management. Namely, the Unum Small / Mid Cap SA Equity Portfolio (JSE Code: UUSMC) for local small/mid-cap exposure and the Unum Global Small / Mid Cap Equity Portfolio (JSE Code: UUGSMC) for global small/mid-cap exposure.

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