Small caps deliver big returns
Active small caps managers are continuing to deliver outperformance, according to a new report by Standard & Poor’s (S&P).
The annual research shows that the median small cap manager has comfortably outperformed its benchmark over three and five years, as well as the large cap benchmark and the median large cap Australian equities manager.
Even the bottom quartile of small cap managers has outperformed the small cap benchmark over five years.
The research examines 23 managers offering 27 funds.
In previous years, boutique firms have made up the majority of managers in the small caps markets, but the S&P report showed a trend by brand name organisations to enter the sector, and they have dominated the top places in performance figures to June 2005.
According to Ramon Eyck, associate director of S&P and report author, small cap management owes a lot to conviction, with the onus squarely on the quality of the investment team, their philosophy and skill.
“If you look at the top 200, the larger companies such as banks and miners have such a sectoral influence that it’s hard to ignore,” he said.
“Yet in the smaller index, stock picking is the name of the game. The environment can be good to operate in.”
The small caps sector has also witnessed huge growth in recent times, with the market cap of the S&P/ASX Small Ordinaries Index increasing by 85 per cent, compared to an increase of 43 per cent in the market cap of the S&P/ASX 200 Index.
“This growth has had a number of implications, with many managers now emphasising capacity limits in terms of percentage of total market cap rather than FUM [funds under management],” Eyck said.
S&P also calculated that the dispersion of returns between small cap managers was a massive 40 per cent for the year to September 30, 2005.
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