Resources drive small cap returns

Only three small cap equity funds scored a ‘highly recommended’ rating in Lonsec’s new sector review report.

The researcher only rated 24 funds in the small cap sector and 12 received ‘recommended’ ratings, seven scored ‘investment grade’ and there was one ‘hold’ and one ‘fund watch’ rating.

The funds that scored the top rating were Eley Griffiths Small Companies Fund, Ausbil Australian Emerging leaders fund and Pengana Emerging Companies fund.

At the reverse end of the scale, Lonsec said there were a number of managers that the company reviewed but decided not to rate.

The review found that in 2005 boutiques were no longer the top performers as the big brands made a strong return.

This was also reflected in returns for the year with the top performer achieving 12.5 per cent while the bottom of the table manager scored -20.9 per cent.

The funds providing the best returns were overweight in resources stocks. Those managers that favoured the larger end of the small caps index also performed well.

But trying to outperform has become harder in the sector, according to the Melbourne-based research house, as the quality of the S&P/ASX Small Ordinaries Accumulation Index has improved.

“This improvement refers to the view that from an overall perspective the quality of stocks in the index has increased with the emergence of more robust and sound companies,” the report said.

“This may over time make it more difficult for the more ‘benchmark agnostic’ managers, and those who use high tracking error limits, to generate historic levels of alpha in the smaller end of the index.”

The report also notes there has been a low turnover of staff in small cap managers and that is seen as a favourable trend.

One move last year, which saw the Macquarie small caps team defect to ING, did result in the ING Emerging Companies fund’s rating reinitiated to ‘recommended’ as the team is now fully integrated.