Upgrade success for Aussie small-cap funds

10 September 2019

Funds with a small-cap bias were the big winners in the latest quantitative FE/Fundinfo Crown Ratings, with five small-cap funds being upgraded to five Crowns, the highest-possible rating.

The latest rebalance of the ratings has provided a boost for those companies sitting in the ACS Equity – Australian Small/Mid Cap sector with several funds receiving an upgrade to five Crowns.

Smallco Investment, Ophir Opportunities and Celeste Australian Small Companies all moved up from two Crowns in February to five Crowns, while the Australian Ethical Emerging Companies and OC Micro-Cap moved from three Crowns to five. 

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Five Crowns were awarded to funds which were in the top 10% based on alpha, volatility and consistently strong performance. In total, there were 17 funds in this sector awarded a five Crown rating.

Small caps have performed well recently, particularly those with a micro-cap slant, and the ACS Equity – Australia Small/Mid Cap sector has delivered 36% over three years versus returns of 31% by the wider Australian equity sector. 

Paul Biddle, portfolio manager of the Celeste Australian Small Companies fund, said: “We tend to stick to our knitting and invest in good quality, strong business franchises with clean accounting. 

“Our broad investment process hasn’t changed over the three years, we run a concentrated portfolio with 30-35 stocks which has proven to be a value-add strategy in the long term.”

He said there were opportunities in small-cap stocks more so than large caps as they were less covered by analysts.

“If you can find those small-cap companies that can grow into big companies then you can make big gains. But you have to have a disciplined process to make sure you avoid those companies that disappear or those which are too complex. There are a lot more pitfalls,” he said.

George Chirakis, chief executive of Ophir Asset Management, said the Ophir Opportunities fund was positioned in companies that could ‘grow no matter what’, particularly those which invested offshore. 

“The fund continues to successfully identify and invest in companies undergoing a period of structural growth and able to grow independently of the economic cycle.

“If you are a long-term investor, it is always a good time to invest in small cap companies although we think that right now is a very exciting time.  For example, we have never seen so many Aussie small cap companies successfully expand their business offshore and take market share from established players.”

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