While investors have been rewarded by strong performances from large and ‘mega-tech’ equities recently, smaller companies trading on exchanges outside the US are offering under-researched growth potential according to MFS Investment Management equity portfolio manager Eric Braz.

The Boston-based manager believes his new MFS Global New Discovery Fund, launched in Australia in August, can outperform the 7,500 names in the MSCI All Country World Small Mid Cap Index (SMID) which has returned close to an annualised 12 per cent over the past 10 years.

Braz, who co-manages the diversified portfolio of 100 companies with Michael Grossman in Boston and Peter Fruzzetti and Sandeep Mehta in London, says the fund is based on a long-term, value, growth and core investment strategy in public companies with a “sweet spot” market cap of between $US1 billion and $US15 billion; topping out at $US33 billion.

*This In Focus article is written in partnership with MFS Investment Management

Put into perspective, Australia is seen as a mid-cap market globally with stocks like Afterpay, valued at about $A33 billion on the ASX, and ANZ, which dipped below $A30 billion last year, at the top end of MFS’s target range.

Benefits for companies in this mid-cap ‘sweet spot’ include growth potential, better liquidity than smaller companies, and a host of mature companies in the mix, Braz says.

“We’re trying to identify what we view as high quality companies with good management teams and good industries with good addressable markets with favourable financial characteristics and we want to own them for a long time,’’ he says, highlighting MFS’s coverage in Europe with its European-based research and investment team, who are able to explore local opportunities at lower valuations.

This gives the manager an edge investing in this region compared to other US and Australian-centric managers, he adds.

The MSCI SMID benchmark is biased towards developed markets with 85 per cent of the index in the US (55), Europe (20) and Japan (10). Emerging market companies are also on the list but have a high bar to jump to be considered in the MFS portfolio, Braz says.

He expects the MFS strategy to have a similar focus on developed markets due to higher geopolitical and other risks for companies in emerging markets.

Core Strategy

Launching the Australian fund was driven by demand from Australian investors looking for a strategy beyond large and well-known companies, he says.

While other global small-mid cap managers see a defensive element to their funds – thanks to the tendency of the Australian dollar to depreciate relative to other developed world currencies in periods of economic stress, thus buffering unhedged Australian dollar returns – the MFS strategy is more pragmatic in its approach, Braz describes.