...and the meek shall inherit the stockmarket

Australia's biggest companies have had their day on the stock market and investors should be looking to smaller companies for stronger growth.

At least that is the opinion of Rothschild smaller companies director Campbell Boag, who argues that small cap stocks have felt the full force of the Asian crisis and are rebounding back to the levels seen in 1997.

"The small cap stock index (small ordinaries) hit a low in last August and has risen 20 per cent since then," he says.

Small cap stocks were battered in the Asian economic crisis as export markets dried up and investors flocked to the relative safety of large companies. In the year to June last year, Rothschild's Five Arrows Smaller Companies fund lost 17.7 per cent.

But since last July, small stocks have outperformed large cap stocks and are likely to continue to do so, according to Boag.

Boag says many small cap stocks are still undervalued by the market and the small ordinaries index has not recovered to the level it was at in 1997.

He says mooted changes to the all ordinaries index could also see sharp rises in smaller companies as the index is divided into two indexes; one with the top 100 stocks and another with the next 250 largest stocks by market capitalisation.

However, Boag warns that investors in small cap funds should have an even longer investment horizon than those investing in funds dominated by blue chip companies as they have a tendency for greater volatility but better returns in the long run.