Over the past 10 years, the managers of Australian small company funds have produced some startling performance figures.
Data provided to Professional Planner by Morningstar suggests that the best funds have generated returns of more than 10 per cent a year, through some of the most tumultuous economic conditions in recent memory.
The best funds in Morningstar’s database have returned well above 10 per cent a year over the past decade. One fund in particular, the NovaPort Premier Smaller Companies Fund, has returned an average of more than 16.5 per cent a year over each of the 10 years.
The NovaPort fund is offered by Challenger Managed Investments, and prior to establishing Novaport, the firm’s principals worked at Challenger.
Several other funds in the Morningstar database have produced returns of more than 12 per cent a year.
To those who follow small company funds closely, these figures underline the basic rationale for investing in small-capitalisation companies.
Tim Murphy, co-head of fund research for Morningstar Australasia, says the investment case for small-cap stocks, and by extension, small-cap- stock funds, is well established, and really has not changed in recent years.
“It can be a performance kicker, because over time smaller companies have tended to outperform larger com- panies, and there’s several reasons for that,” Murphy says.
Another reason is diversification. Murphy says a small companies fund will generally have exposure to a greater number of underlying com- panies, because few single stocks ac- count for more than about 2 per cent of the generally recognised benchmark, the S&P/ASX Small Ordinaries Index. This covers the 200 stocks in the S&P/ ASX 300 Index that are outside the S&P/ASX 100 Index.
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