In Focus: Getting a bigger bang for your buck

The boutique fund manager NovaPort Capital declared at the end of March that a third of all Australian Securities Exchange (ASX)-listed small-capitalisation companies will increase their net earnings by at least 10 per cent a year over the next three years.

NovaPort, a specialist small-cap fund manager, said that almost two-thirds of the small-cap sector could be classified
 as having “moderate” or “high” growth potential, with the 10-per-cent-plus “high-growth” cohort representing 34.6 per cent of all small-cap companies.

That is welcome news – or, at least,
 a welcome forecast – for a sector that severely underperformed its large-cap counterpart during 2012. Research firm Lonsec said in a report released in March that the S&P/ASX Small Ordinaries Index returned 6.6 per cent compared to 20.3 per cent for the S&P/ASX 200.

However, it added that “the majority of managers in the Lonsec small-cap peer group considerably outperformed the benchmark in 2012”, underlining the commonly held belief that small-cap managers generally deliver greater alpha – or return in excess of the benchmark – than large-cap managers.

Michael Courtney, portfolio manager
 for Ellerston Capital, which manages the Zurich Investments Small Companies Fund, says there are two ways to gauge the performance of small-cap fund stocks and managers.

“You can look at it in absolute terms or in risk-adjusted terms,” he says.

“The volatility of returns – the standard deviation of returns – does show that the small-cap index has been more volatile than, say, the ASX 100 Index.

“But then the other way to look at it is on a risk-adjusted basis, which is where you say, what’s the return versus the risk?

“If you look at the median small-cap manager versus the median large-cap manager, the median small-cap manager [has produced] a much higher level of return for the level of risk.”

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