Look to large caps for short-term outperformance

Small cap funds have failed to beat their large cap peers over three years, with large cap Australian funds returning an average of 30% over three years to 31 August, versus returns of 25% by their small-cap peers.

The trend was also seen in the global space with global small/mid-cap funds returning 32% compared to 43% by global large caps over three years.

While the best individual fund performance came from small/mid-cap funds, there was far greater disparity within the sector between those funds which were winners and losers. In contrast, the large-cap sector had far more constituents but less varied returns.

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It also indicates those holding small/mid-caps funds have to wait longer to see outperformance with most funds recommending at least a five-year time horizon. In line with this, small and mid-caps have outperformed over the longer term with that sector beating large-cap funds over five, seven and ten years.

Small and mid-cap fund performance

The best-performing fund in the ACS Equity – Australia Small/Mid Cap sector over one year was Bennelong Emerging Companies which returned 28.2% while the worst was Equitable Dragonfly which lost 20.1%.

Managed by Mark East, Bennelong Emerging Companies was only set up in November 2017 but has returned 83% since its inception. Equitable Dragonfly was set up just two months before the Bennelong fund but, in comparison, has lost 21% since then.

The worst fund over three years was Forager Shares which lost annualised 5.5% over three years to 31 August while the best over three years was Macquarie Small Companies which returned an annualised 15.4% over the same period.

Forager Shares was set up in November 2009. While it has underperformed in the short-term, it has returned 129% since being first launched.

Macquarie Small Companies is the oldest fund on this article and was launched back in July 2002 and has returned more than 800% since inception.

Large-cap fund performance

When it comes to large-cap funds which sit in the ACS Equity – Australia sector, over one year to 31 August, the best was Yarra Australian Real Assets which returned 25.2% while the worst was Perpetual Pure Value Share fund which lost 9.6%.

Managed by Geoff Frankish, Yarra Australian Real Assets was launched in 2005. Rather than invested in ASX-listed equities, the fund invests in Australian-listed infrastructure and utilities. The Perpetual Pure Value Share fund was launched in 2006 and managed by Paul Skamvougeras and James Rutledge, a high-conviction portfolio with between 10-20 shares.

Over three years to 31 August, the best was DDH Selector Australian Equities which returned an annualised 15% compared to losses for the BetaShares Australian Equities Bear Hedge which lost an annualised 9.3%.

DDH Selector Australian Equities was launched in 2002 and is structured to give investors’ access to wholesale portfolios managed by QIC. Although it is a large-cap fund, it can include small-cap stocks and has an above-average time horizon of seven years.

Finally, the BetaShares Australian Equities Bear Hedge fund is an ETF launched in 2012, the newest fund in this article. In line with its ‘bear hedge’ title, the fund acknowledges an increase in value in the ASX 200 would result in a decrease in value of the fund and that it seeks returns which are negatively correlated with market returns. However, should the ASX 200 decrease then the fund would see an increase in value.

Australian equities v Australian small/mid cap fund sector performance three years to 30 August 2019

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