By Mak Yuen Teen
On May 11, Business Times ran an editorial titled “There is a need to boost interest in small caps in the Singapore market”. The editorial cited some dismal statistics, particularly that “between January and April, the FTSE ST Catalist Index lost 8.3 per cent, a slide that is made all the more stark when extended back 12 months – a fall of 17 per cent versus a rise of 9.8 per cent for the STI. Similarly, the FTSE ST Small Cap Index is down about 6 per cent since May last year.”
The editorial attributed this to two possible reasons – higher borrowing by smaller firms and lower income diversification due to their domestic focus. It then suggested two measures to address the woes – allocating significantly more shares to the investing public in initial public offerings and increasing research coverage for such firms.
I do not believe that the reasons cited are the real reasons for the dismal performance of the smaller companies or that the measures suggested address the root causes. In my view, the real reasons are the quality of companies listed and the lack of investor protection. These factors disproportionately affect the smaller companies. For one, larger companies tend to be of better quality and SGX has been successful in attracting mainly small companies to list (or small companies spinning off baby companies as additional listings). The quality of the smaller companies is also questionable.
Take the case of the first “fintech” listed here – Ayondo – which lost 50 percent of its value within a month after listing and is now trading at 48 percent below its IPO price. It is also hardly surprising that the FTSE ST Catalist Index has not fared well, since Catalist is gradually becoming somewhat of a graveyard for dying companies, as more companies downgrade from the Mainboard to avoid being put on the watchlist for three successive years of losses. There are more companies downgrading from the Mainboard to Catalist than upgrading from Catalist to the Mainboard – the intent of Catalist in the first place must surely be for growth companies to become more established and move up to the Mainboard.
Allocating more shares to the investing public when the quality of companies listed is poor is just giving them a greater opportunity to lose money. Therefore, the real answer is to first improve the quality of companies listed.
The second reason, lack of investor protection, also affects smaller companies more because larger companies tend to care more about reputational risk – public embarrassment may be enough to push them to do the right thing. Further, they also tend to attract more interest from institutional investors who provide some checks and balances and to have better corporate governance. In a coming article, I will discuss more what we can do to improve investor protection – an issue that I believe needs to be urgently addressed.
The lack of research coverage arguably also has to do with the quality of companies listed. If we have high quality companies, there will be more investor interest, which should in turn generate more research coverage. It’s a chicken or egg problem. Increasing research coverage when the quality of companies listed is poor or investor protection is weak may be more useful in identifying poorer companies for the purpose of shorting their shares. If we are looking for more research to help investors decide what companies to invest in, then we need to make sure that there are enough good quality companies first.
