“Mega cap companies” are generally thought of as those whose total value of all shares in issue is above $100 billion. Most mega cap companies share some desirable characteristics. To become gigantic companies generally need to have had something special. Whether or not this something special will continue is key to determining which mega cap firms may make good long-term investments.
So what are the shared desirable characteristics of Mega cap companies?
Diversification. Gigantic companies are generally much more diversified than smaller companies. Their businesses typically span geographic regions and have multiple products. At some stage all businesses experience some disruption. Being well diversified means that difficulties in any particular region, or with particular products, do not cause critical damage to an organisation.
Predictability. This diversification helps to make the profits from mega cap companies more predictable. Much modern finance theory encourages big institutional investors to value such certainty more highly.
Economies of scale. Mega cap companies typically have substantial economies of scale. From a financing perspective rating agencies typically provide higher ratings for mega cap companies enabling them to borrow for less. Size also confers operational advantages. Payment network operators Visa and Mastercard, for instance, are much bigger and more efficient than peers. This enables some mega cap companies to be able to provide lower cost solutions than others.
People. Mega cap companies have the ability to attract and retain talent from smaller organisations, or simply to acquire them.
Liquidity. Shares in mega cap are typically highly liquid. People and institutions regularly trade in these stocks. This results in lower transaction costs as the spread between bid and ask price is low, and enables positions to be bought or sold more easily than smaller companies. In “risk-off” environments the relatively lower liquidity in smaller capitalisation stocks can mean that share prices fall more dramatically than they do for larger companies when there are more natural buyers of shares.
For more information on our Global Leaders Equity Fund and Portfolio, that invests in mega cap stocks, visit: www.ashburtoninvestments.com/global-leaders-equity-portfolio