Active management key for small cap
Robust performance by active small cap managers demonstrates the importance of active management for small cap investing, Zenith said.
The ratings house has identified that a passive large cap strategy has overtaken a passive small cap strategy over the past 17 years.
Zenith's Australian Small Companies Sector Review showed this has happened on both an absolute return and risk adjusted basis.
But Zenith equities analyst Quan Nguyen said strong levels of excess returns produced by active small cap managers offset the underwhelming result over the long term.
"Small cap funds have again delivered strong excess returns over the course of 2014. However, we have observed that the level of excess returns has reduced significantly relative to prior years," he said.
The average small cap manager absolute net returns stood at 1.6 per cent, while the S&P/ASX small ordinaries accumulation index delivered -0.76 per cent, which is an outperformance of 2.4 per cent.
Over the three year period to 31 December 2014, the outperformance rate was 18.5 per cent per annum.
Four fund products out of 59 were rated "highly recommended" including Fairview Equity Partners Emerging Companies Fund and Bennelong Ex-20 Australian Equities Fund, while 23 were rated "recommended".
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