Mid-caps on the rise

After years of neglect, a growing number of medium-to-small Greek companies has finally got it. In addition to consistently presenting a good set of financial results, they need to attract the attention of foreign funds to maximize their shareholders’ value. This is the right thing to do but the newcomers, as well as some of the «old» companies in the roadshow business, continue to undermine their investment cases by repeating the same «very Greek» mistakes. They should take notice and correct them if they want to sell their stories more effectively abroad. For the first time since the heyday of the stock market, the medium-sized companies that make up the so-called small-cap MSCI-Greece index have managed to beat the returns of the large-caps, comprising the standard MSCI-Greece index, last year. We are referring to the MSCI (Morgan Stanley Capital International) stock-market indexes because more institutional money is tied to them than to any other index worldwide. The standard MSCI-Greece index, which includes the large banks and industrial companies, returned 29.8 percent in local currency against 35.3 percent in the small-cap MSCI-Greece index. The same trend appears to be holding so far this year as the large-caps gained 7.3 percent year-to-September 22 and the medium-sized Greek firms more than doubled it to 15.48 percent. This was not the case before: In the first two years of the global stock-market rally, that is, 2003 and 2004, the stocks of the Greek blue chips managed to outperform their smaller counterparts by far. In 2003, the first year of recovery after the bear market, the standard MSCI-Greece index gained 35.7 percent, outperforming the pan-European index. The Greek small-cap index gained 19.1 percent. The gap became wider in 2004 when the stocks of blue chips returned 31 percent against a mere 3.6 percent of their medium-sized counterparts. The superior returns of the Greek large-caps in this period was mainly due to sizable purchases from non-resident portfolios, including pension funds, hedge funds, mutual funds, insurance companies and others. Undoubtedly, this would not have been the case without the announcement of better-than-expected profits and earnings visibility. The outperformance of Greek stocks also stemmed from another factor – the importance most of these Greek large-capitalization companies had paid to investor relations (IR). Realizing they cannot rely on the domestic institutional portfolios whose assets under management continued to decline as banks absorbed their investment companies and mutual funds continued to experience redemptions from their shareholders, the large-caps managed to put together good IR teams. By providing a constant flow of corporate information to current and potential institutional investors, organizing roadshows abroad and presenting a good set of financial results consistently they were able to tap a wider base of investors and boost their shares. The big majority of medium- and small-sized firms were not fast enough in understanding the importance of investor relations and the changing composition of the Athens Bourse’s shareholder base. They too had a good set of financial results to show along with an attractive valuation vis-a-vis their European counterparts but they did not have the means to communicate them to the investment community abroad. It did not come as a surprise therefore that their stocks under-performed the Greek blue chips at the same time that the opposite was happening at a pan-European level. Finally, they started moving and took steps to strengthen their appeal to foreign mutual funds, pension funds, hedge funds and insurance companies. They started improving their communication with the community of analysts, provided better guidance and beefed up their IR departments. The resulting roadshows and the pickup in analyst coverage started paying off, since they attracted foreign investors who paved the way for the 2005 outperformance of the small-cap MSCI-Greece index. Since then, about a year and a half ago, more and more local companies are trying to build their reputation and establish links with the international investment community, perhaps disillusioned with the weak Greek institutional portfolios. But in so doing, they are making some mistakes that restrict their appeal, as pointed out by the managers of some foreign funds. Mistaken approach First, by going out later than some other companies in their own sector, usually of bigger companies, and presenting a similar growth story, they do not seem to understand they are at a disadvantage compared to their peers. Why should a fund choose to buy their shares instead of their bigger counterparts if it has to chooses between two similar growth stories? It simply does not have to unless the newcomer is much cheaper than its peer from the same sector but this is not always the case. Second, the newcomers, more than their more experienced peers, present a nice, flawless investment story. However, everybody knows there is no perfection. «You ask them if there are any risks and they still try to convince you there are none. However, everybody knows there are risks; this is not something I appreciated because I don’t have time to waste,» says a fund manager who visited some of the presentations during the Greek Day event organized by Hellenic Exchanges in the Bloomberg building last week in London. This is a typical Greek reaction. Bury or downplay the risks in the hope the other guys buy the argument. However, this is not a smart approach when you deal with fund managers who have a lot of experience. It is encouraging to see more and more Greek companies, especially mid-caps and small-caps, understanding the importance of tapping the huge pool of investment money abroad in a bid to maximize their shareholders’ value. They would be strongly advised to try to be different than the big guys of their sector and more realistic in their presentations of facts and potential risk. The truth never hurts.