Small caps becoming top choice for all fund types
Independent investment experts are moving towards the small cap sector as the global share market continues its volatility.
After 10 interest rate rises in the past 12 months, the benchmark S&P/ASX Small Ordinaries Index dropped 14.7 per cent versus a 3.5 per cent decline for the broader S&P ASX 200.
The small cap market, compromised of companies with a market value of a few hundred million dollars to $2 billion, sank 19.5 per cent with the biggest loss recorded in June 2022.
However, looking at year-to-date data, the asset class has really only slightly under-performed the larger offerings returning a benchmark of 3.4 per cent compared to the ASX 200’s 4.1 per cent.
Simon Brown, co-portfolio manager of the Tribeca Smaller Companies Fund, said the small caps market can be a challenging and daunting space for investors in the SMSF sector to invest in directly, but through a managed fund investors have the chance to diversify, and in the current climate investing in small caps is becoming a more attractive strategy.
“The small caps market offers a more diverse opportunity for investors to invest,” he said.
Recent investment market news is also now showing a trend towards the larger funds looking towards the smaller end of the small caps market.
Mr Brown said Tribeca focuses on the stocks below the top 50, but there is an increasing trend among larger firms like AustralianSuper to look to even those stocks under the top 100.
“As a result of less research analyst focus on the small cap sector, this enables small cap stocks to often fly under the radar. Further, there is a reasonable amount of forecasting errors in this market space, enabling those with the appropriate resources to uncover mis-priced investment opportunities.”
Mr Brown said one of the upsides of small cap investing is that it not only provides diversity but it also gives investors access to companies in new industries that they may not get the exposure to at the larger end of the market.
“It is also often easier to grow revenue in small caps when your base is smaller and this provides opportunities for faster growth.”
“It may be more of a challenge for the SMSF sector as it can be hard to get information around these emerging companies, but we are seeing a lot more interest in small-cap investment recently through our fund.
“Small caps may have materially under-performed recently, and they currently offer good value compared to the large caps market.”
Mr Brown said the small caps market has a lot more domestic exposure and this reflects where the Australian economy stands at any given period.
“As funding costs continue to go up for lenders and they pass this into the economy, it can result in less attractive investment opportunities and thus growth can slow.”
“While the small caps universe has more domestic exposure in general, it is a big universe and there is a lot of diversity. Resources and consumer discretionary are relatively large sectors but include a wide variety of individual names with varied exposures.”
He believes the tide is turning in regard to small cap investment and sees attractive opportunities in some of the more depressed sectors where expectations are low, and where valuations are now comparably very attractive.
“Inflation appears to be in the process of normalising and the AUD has bottomed, both of which should bring some relief to small cap margins just as larger names begin to cycle their pricing power benefits.”
