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SMSFs should consider small caps allocations

Adrian Ezquerro
Sarah Kendell
09 October 2019 — 1 minute read

SMSF investors would do well to consider a small caps allocation to boost growth in their equities portfolio, given the sluggish earnings outlook for Australian large cap stocks in the coming year, according to Clime Investment Management.

Addressing a media lunch in Sydney on Tuesday, the fund manager’s head of investments, Adrian Ezquerro, said with earnings forecasts for the ASX 100 being consistently revised down this year, it was a good time for investors to consider an allocation to small caps.

“At the start of this financial year, the ASX 100 was forecast to produce 8.8 per cent growth for this year. As we progressed that was dialed back to about 6.5 per cent, and as of today, there was a Macquarie note updating the data, so you are looking at 5 per cent growth,” Mr Ezquerro said.

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“So, you can see the ASX 100 large caps growth rate is peeling back in what is broadly an unexciting macro growth environment.”

This compared to a growth rate of around 20 per cent for stocks outside the ASX 200 in the current financial year, he said.

“If you were to look at that in isolation, it stands out that there is a significant difference in the growth profile, and as an analyst the next thing you would ask is, what are you paying for that growth profile?” Mr Ezquerro said.

“You would think there is going to be a massive pricing premium, and certainly if you looked at it on a stock-by-stock basis, any company that can produce outsize growth sustainably will be priced with a higher multiple. 

“But interestingly, the forward P/E for the ASX 100 is about 17, and for small caps outside the 100 we are looking at 17.4, so you are paying a very small premium for a far superior growth profile.”

With a client base of around 80 per cent SMSFs, Mr Ezquerro said the firm was mindful that small caps were not the be-all and end-all of an equity portfolio but could help to boost long-term capital growth for those looking towards retirement.

“We had a strong look at ourselves some years ago about how to best serve our clients that need some growth to maintain their lifestyles and, at a later date, fund their pension, so really coming up with an ‘all cap’ strategy that looks right across the market… [and] provides the right balance of growth and income,” he said.

“I’m not completely writing off large caps because they do have their role in the portfolio, particularly with fully franked income, but I think it’s the law of large numbers that as businesses mature, maintaining growth rates becomes difficult unless you’ve got a viable offshore strategy.”

SMSFs should consider small caps allocations
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