INVESTORWEB Research has recommended just four small companies managers in its annual review of the sector withAMP,Equity Trustees-SG Hiscock,InvescoandPortfolio Partnersbeing placed on the group’s recommended list.
The four managers were chosen from a list of 12, with InvestorWeb stating most of the managers on the larger list were given a buy rating due to the fact that they added at least five per cent per annum in excess returns.
The notable exception to the recommended list wasColonial First State(CFS), which operates two funds, the Developing Companies and Future Leaders, which were downgraded from exceptional buy and strong buy respectively, to buy.
InvestorWeb says its opinion of the funds’ new portfolio manager, Graham Burke, is high. But the research group says the funds have developed excessively large pools of small cap money and while they will continue to perform well, it says there are better opportunities in the sector.
The issue of fund size was crucial according to InvestorWeb, which has favoured smaller managers in the construction of its recommended list, arguing that those small cap managers with large pools will struggle to replicate past performance.
InvestorWeb head of managed funds Martin Kerr says the list also did not contain a number of managers because they were not rated due to having closed funds.
Other managers in the report includedAdvance,Australian Unity,Challenger,Credit Suisse Asset Management,JB Were,MacquarieandSagitta.
Equity Trustees, Challenger and Australian Unity took out the top three spots for one year’s performance in the sector, returning 55.49 per cent, 53.16 and 35.5 per cent respectively.
On the whole, Kerr says the small cap sector performed very well over the past 12 months, producing three-year returns from just over three per cent up to nearly 19 per cent across the dozen managers listed in the report.
The small companies sector underperformed the S&P/ASX50 and 200 indices for the three and five years to September 2002, but over the last 12 months bucked that trend as investors sought undervalued stocks to invest in.
However, the report says that professional small cap managers have, on average, produced investment returns exceeding not only the small companies index, but also the large cap ASX50 index and the broader market over one, three and five years.
Despite recommending the four funds and the overall performance of the sector, InvestorWeb has stated that only 10 to 15 per cent of an Australian equities portfolio should be allocated to small cap managers because of the inherent volatility of the sector.
