White-knuckle ride for small caps

Ratings house Standard & Poor’s has described 2008 as having been a “white knuckle ride” for small cap investors, with the sector having borne the full brunt of a diminished appetite for risk.

In a review of the Australian equities small cap sector released this week, S&P analyst James Gunn said despite this there was now a high level of enthusiasm among small-cap fund managers at the prospect of the long-term opportunities that had emerged in the sector.

However, he said that while investor sentiment towards small caps had improved significantly over the past two months, S&P expected the environment would shift more in favour of the stock pickers and the potential for alpha generation would only be enhanced, which was the key attraction for investing in small caps.

Looking at the sector, the S&P analysis said the stronger relative performance of the small cap peer group last year was in part a reflection of the greater propensity to outperform in down markets, although an underweight exposure to cyclicals had also been a strong contributor to the excess returns generated in the second half of the year.

It said that for some, these relative gains had been partly eroded over the last couple of months, with stocks leveraged to an economic recovery back in favour at the expense of the defensives.