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Institutions avoid illiquid small caps

Poor liquidity and a low free float of shares are major barriers to shareholder returns for listed companies with small capitalisation. Both local and overseas institutional investors pay little attention to small-cap stocks because they are difficult to buy and sell at reasonable prices.

Adisorn Sermchaiwong, chief executive of BoA Asset Management, said bids and offers for small-cap stocks rarely matched. "Most of the shares are in the hands of the company's owners or major shareholders who do not want to sell their holdings," he said.

Small-cap stocks have a total market capitalisation of no more than 1.7 billion baht. Most have almost frozen capital-raising and expansion.

Their free floats _ the number of shares available for trading _ are lower than the 15% limit required by the SET, and daily trading is illiquid.

On the Shareholder Scorecard, Mandarin Hotel Plc produced the highest one-year return at 511.4% while Digital Onpa was the worst performer.

A financial executive at Mandarin said the company focused strictly on the two hotels in its stable, Mandarin and Plaza Suriwong, and had only 26 million baht in debt as of Sept 30.

Last year it sold a serviced apartment to repay most debt and put in place a strategy to cut expenses. Nine-month net profit was 56.32 million baht.

Although small-cap stocks were shunned by institutional investors, they appealed to the sort of retail investors who traded mainly on rumours, said Namcha Techarattanaviroj, a senior strategist at Phillip Securities.

"Retail investors are more flexible. They follow the market mania, spend some money and enjoy good profits from small-cap stocks," he said.

However, not all small-cap stocks were necessarily less attractive than blue-chips to institutions, said Mr Adisorn. Some small companies have adjusted more quickly during the crisis than giant players, focusing on niche markets in which they could become business leaders.

The biggest concern of institutional investors about small-caps is governance, transparency of management and timely information disclosure.

"It's a matter of trust and professionalism. In many cases, we don't know about the executives and their backgrounds because the companies are very small and low-profile," said Mr Adisorn.

Cholathee Pornrojnangkul, a fund manager at SCB Asset Management, offered another perspective of institutional investors' reluctance.

"They won't heavily buy any small-cap stock in one day because this may dominate the stock's trading and create unusual movements," he said.

Some mutual funds, he said, would take two or three months to gradually acquire sizeable positions in small-cap stocks.

- Krissana Parnsoonthorn