Global small caps offer diversification for Aussie investors

Australian investors should consider opportunities in the global small-cap space for a better diversification given that global small caps performed better than the Australian small caps on a risk-adjusted returns basis, according to Eaton Vance.

The firm’s director of global small equities, Aidan Farrell, stressed that the MSCI World Small Cap index captured small cap representation across 23 developed markets countries, with 4,203 constituents, and the index covered approximately 14% of the free float-adjusted market capitalization in each country and presented a very broad opportunity set.

But, at the same time, the performance of small caps versus large caps was very strong over the last 20 years and, as an example, global small-caps achieved a total return of about 270% in Australian dollar terms over the last 20 years which was over double that of global large caps, with better risk-adjusted returns also.

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 “It comes as no surprise that the lion's share of equity market capitalisation and investors’ attention are focussed on large cap companies, which is about 1,600 companies globally in the large cap benchmark analysed on average by about 15 research analysts from the broking community, the sell-side community,” Farrell said.

 “The MSCI World Small Cap index holds 169 Australian small-cap companies categorised by MSCI versus over 4,000 in the global small cap benchmark itself. Apart from this, we believe the investable universe is up to about 7,000 companies. So, diversification away from home country is the biggest draw from an Australian perspective.”

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