Small boutique managers in the small cap Australian equities sector have been facing increased business risk as a result of declining funds under management, according to the latest Lonsec Small Cap Australian Equity Sector Review.
The review, the details of which have been provided to Money Management, rated only three funds in the top ‘highly recommended’ category – Eley Griffiths Group Small Companies Fund, Ausbil Australian Emerging Leaders Fund and Pengana Emerging Companies Fund.
Commenting on the state of the sector, the Lonsec analysis said on an absolute return basis, the year to March 2009 had been very disappointing, with the ASX Small Ordinaries Index declining 45.8 per cent.
It said with such a large decline in equity markets, it was not surprising that it had been matched with a reduction in average funds under management (FUM).
“As a result, business risk has increased, particularly among the smaller boutique managers in the sector,” the analysis said. “However, a large number of boutique managers rated by Lonsec are supported or part-owned by a larger institution.”
It said while advisers could draw some comfort from this fact, Lonsec cautioned that in the current climate, with even large global managers making large staff cuts and many large financial institutions having to raise capital, this was no guarantee of business survival.
“Ultimately, all managers need to grow FUM to economically sustainable levels and to a level where research budgets and investment management activities like company visits are not curtailed,” the Lonsec analysis said.
It noted that the entire Lonsec small caps universe had outperformed the ASX Small Ordinaries Accumulation Index for the 12 months to March.
However, while this was pleasing, advisers should look beyond the results and consider that in a market with such a large decline, fund managers holding high levels of cash were more likely to outperform the market benchmark.
“Lonsec found in this review that cash levels were indeed generally in the upper ranges of permissible and historical levels,” the analysis said.
