Asian small cap stocks an opportunity for SMSFs
Many SMSF trustees are missing out on the potential benefits offered by outperforming international equities such as Asian small caps, according to an investment manager.
Acorn Capital head of research Paul Quah said a 2014 study showed that superannuation funds with a stronger performance were also those with a higher exposure to international assets, especially shares and property.
“But many investors including trustees or SMSFs are yet to realise the potential benefits of increasing their investment allocation to international equities,” said Mr Quah.
According to Acorn Australia, Australian investors hold 73 per cent of the Australian equities market.
“The risks of this bias can be expected to compound as a result of continuing superannuation inflows and the general softening unfolding in the Australian economy,” he said.
Mr Quah said SMSF investors may be missing out on returns, with Asian small caps significantly outperforming Australian small caps by at least 7 per cent per year over the past 5 to 10 years.
“They have also outperformed the broader Australian market by 2.8 per cent a year over the past 10 years,” he said.
While there have been some concerns around transparency and corporate governance in the region, Mr Quah said standards are improving.
“It might surprise many Australian investors to know that we usually find Asian small company balance sheets to be more than adequate for their growth ambitions, which we think may be a function of the hard lessons learnt during the 1997 Asian financial crisis and the global financial crisis in 2008,” he said.
Another benefit of Asian small caps is that investment opportunities are not generally as well known, which means small cap investment opportunities are unlikely to be ‘priced in’.
“This is borne out by the lack of professional analyst coverage or institutional shareholdings in these companies – something Australian investors are able to benefit from,” Mr Quah said.