Australian small cap investors should turn their focus to the increased use of technology across the financial services sector, and the investment opportunity it presents, according to DNR Capital.
DNR Capital’s Australian Emerging Companies fund portfolio manager, Sam Twidale, said traditional financial services companies in Australia had long benefited from favourable regulation, limited competition and captive customers, but as change sweeps the industry, investors could be gaining exposure to new opportunities.
“We are witnessing this change now as new business models emerge adopting the latest technologies, with today’s tech-savvy customers receptive to change,” he said. “In the Australian small cap sector investors can gain exposure to these niche opportunities, which is not the case in the ASX 100, which comprises the larger incumbents being disrupted.”
Twidale said he also expected that the mandated introduction of open banking on 1 July 2019 would have important implications for the Australian financial services landscape, accelerating the level disruption.
“We expect a range of new innovative products and services to arise to take advantage of open banking, with greater availability of data providing opportunities for Australian FinTechs to thrive,” he said.
Twidale singled out Afterpay Touch Group as one of the companies to benefit from the transition to open banking.
Looking at the performance of the Australian small/mid cap sector in FE Analytics, the sector average was 0.48 per cent for the year to date.
The top performing fund, the Hyperion Small Growth Companies fund, returned 12.68 per cent in that time period, with top holdings in HUB24, IRESS, Wisetech Global Limited, Technology One Limited. Five of its 10 top holdings lie in information technology, which suggests that that asset class has been a big driver of performance.
CFS Australian MidCap sat in second place with 12.57 per cent returns, followed by Fairview Equity Partners Emerging Companies, which returned 12.37 per cent.
The chart below tracks the performance of the top three funds as compared to the sector for the year to date.
