Monthly Archives: March 2016

Replicate private equity with small-cap value exposure

I just started thinking of ways of reducing cost of getting private equity exposure – which can be as high as 2%/20% – without sacrificing too much the return. An interesting idea that I came across is the idea of getting a similar exposure by investing in small-cap value-driven funds. Presumably there are two ways of achieving it:

One way is to invest in small-cap value ETFs. The downside is that it could be quite illiquid – with a large bid-ask spread and has limited choice of countries (nothing much beyond the US). It is something I need to investigate further.

The other way is to invest in small-cap value mutual funds. The downside is that the expense ratio could still be quite high and it is a challenge to identify the right mutual fund manager that has sufficient local knowledge and strong stock picking skills.

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How investment can benefit from technological improvement

Total factor productivity growth, or advancement in technology is something quite hard to forecast, and yet fundamentally drive economic growth and long-term asset returns.

However, it has been a great challenge to get decent risk-reward balance by directing investing in technology companies, due to the great challenge of predicting the winner of new technology and how the incumbents are disrupted by new technology, which results in a high risk of overvaluation of current winners. Venture capital investment is probably another way, but the ex-post return can be easily reduced by the hefty management fee. Investing in individual private companies with a team that are adaptable to new technology could be another way, though it entails high idiosyncratic risk.

I think another way to invest that benefit from technology advancement is to invest  in those that are indirectly benefited from technology advancement, such as companies with high R&D, or those that are constantly trying to adapt to new technology. On a macro level, investing in countries – via debt or equity indices – with strong entrepreneurship environment could be another way.

 

 

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