2015 was another strong year for Small cap funds according to Zenith Investment Partners Australian Shares Small Companies Sector Review released last week.
Quan Nguyen, Zenith‟s lead analyst on the Australian Small Cap sector said „over the last 12 months, the active small cap funds on Zenith‟s Approved Product List outperformed the S&P/ASX Small Ordinaries Accumulation Index by an average of 5.7 % net of fees. While an excess return of nearly 6% is not to be sneezed at, it is in stark contrast to the performance heights of 2012 and 2013, where Zenith‟s approved small cap managers outperformed the benchmark by an average of 16% p.a.”
Nguyen went on to explain: “The key to outperformance during the 2012 to 2013 period was overweighting industrials and underweighting resources. However, with the resources sector having bottomed post this period, the trade for this excess return driver has largely played out.”
“With many managers steering clear of resources companies, capital has instead been deployed towards high quality industrial companies which have had greater earnings certainty and cash flows. As a result, in many cases valuations on industrials companies have outpaced underlying earnings growth.”
Nguyen also commented: “Strong performance will naturally drive an increase in market capitalisation and liquidity and those success stories will be promoted out of the index. While that is good news, in terms of index construction it becomes the case of a small cap company being a victim of its own success. The majority of small cap managers are restricted in some way to continue to hold, let alone purchase, stocks that have been promoted out of the index. In other words, the opportunity set of high quality, defensive stocks, and hence excess return potential has been reduced.”
“The forward prospects for active management within Australian Small Caps‟ are strong” said Nguyen. “The S&P/ASX Small Ordinaries Index as it stands now is a healthier index versus June 2010 for example, when resource stocks represented roughly 45% of the index. Currently, resource stocks represent around 10%. The addition of stocks from a wide range of sectors and the removal of many resource stocks has provided much greater diversification. In addition, the level of performance dispersion within the Index has increased significantly over the past three years.
“Overall, we believe the current environment provides more scope for active managers to outperform by leveraging their strengths in stock selection.”
All details can be found in the Zenith 2016 Australian Shares Small Companies Sector Report.
Summary of the Zenith 2016 Australian Small Companies Sector Review
From an initial universe of 64 products:
3 were rated “Highly Recommended”
28 were rated “Recommended”
7 were rated “Approved”
1 was rated “Redeem”25 were “Not Rated”
