Active small cap managers could outsmart rocky markets

19 March 2019

While last year’s shaky fourth quarter saw small cap stocks suffer, an active strategy could help these assets hold their worth in tough markets, according to Zenith head of equities, Quan Nguyen.

While the S&P/ASX 300 Index fell 8.4 per cent, the S&P/ASX Small Ordinaries Index fell 13.7 per cent, and according to the firm, it's no surprise given small companies display higher beta relative to their larger counterparts.

Nguyen said despite smaller companies exhibiting higher market sensitivity, exposure to the asset class could be gained without these higher levels when active management is employed.

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He said, over the long-term, the firm’s rated active smaller companies funds exhibited market sensitivity levels that were either lower of similar to the broader markets due to the benefits of drawdown protection and the impact it has on recovery of an investor’s capital balance.

Zenith’s smaller companies funds even managed to recover from drawdowns faster than the broader small cap market during the GFC, with the average recovery duration being 25 months.

“In general, smaller companies managers have participated fully in market upswings whilst also providing significant downside protection,” he said. “We believe this highlights the benefits of active management, especially in less efficient segments of the market”.

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