Smart beta in small caps pays off

Index strategy in liquid Australian small companies paying regular dividends are expected to generate greater returns and lower downside over the long term compared to small companies that do not pay regular dividends, VanEck said.

According to the company’s “Mastering Small Companies with Smart Beta” study, the MVIS Australia Small-Cap Dividend Payers Index (MVS Index) had benefitted from strong returns and lower downside risk over the long term compared to the benchmark market capitalisation index, the S&P/ASX Small Ordinaries Index.

Also, the outperformance was the result of its dividend filter which produced a quality portfolio and provided exposure to stocks with low volatility, VanEck said.

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VanEck Australia’s managing director, Arian Neiron, said that a smart beta approach had the potential to provide strong returns investors associated with small companies at an attractive risk profile for a third of the cost of an average actively managed small-cap fund.

“Dividend screening is the first point of difference between the MVS Index and the standard market capitalisation index, the S&P/ASX Small Ordinaries Index,” he said.

“Excluding non-dividend paying companies excludes lower quality companies. The MVS Index outperforms because it has a quality tilt.

“To date, it has been difficult to add value using well known smart beta approaches in Australian small companies and in the past active managers have been able to outperform the Small Ords charging a hefty management fee but many high pedigree managers are capacity constrained.”

According to VanEck, since listing on the Australian Stock Exchange (ASX) two years ago MVS attracted $55 million in assets and managed to attract interest from institutions, financial advisers and self-managed super funds (SMSFs) who were seeking the low cost, transparency and tradability of exchange-traded funds (ETFs), but with a demonstrable track record compared to the S&P/ASX Small Ordinaries Index.


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