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Funds not all they're cracked up to beTHERE is concern among fund managers that medium-sized JSE companies with good growth prospects are being driven to unrealistic heights. Part of the reason is the growth in emerging company and specialist unit trusts focusing on the mid-capitalisation shares. These funds have become popular among investors because of high historical returns. But fund managers say smaller funds can easily outperform larger ones, but the market is running out of quality mid-capitalisation shares which still offer good value. The shortage forces managers to start buying larger companies with more liquid shares, such as Anglo American, where returns are less exciting. "It is easy for funds invested in mid-capitalisation stocks to show outstanding performance while they remain small," says one fund manager. "The problem is they do not remain small for long. Investors see fantastic growth rates achieved in the past and expect it to continue. They pour money into these funds so mid-capitalisation stocks are driven to unrealistically high levels." High PE ratios are flattering for company management, but unless it delivers what shareholders are looking for, a re-rating is inevitable. A recent case in point was Tigon, asked to account for its extraordinary foreign earnings earlier this year. Shareholders were unimpressed and bid the shares down by a PE of 100 to 24 in nine days, wiping R100-million from its market value.
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