Small cap outperformance driven by positive earnings growth

Investors would be worth considering exposure to Australian smaller companies as they have performed better than large-cap counterparts and have achieved positive earnings growth, Flinders Investment Partners believes.

Earnings growth expectations for companies in the Small Ords index was 24.5% compared to 11.8% for companies in the ASX 100 and small companies were trading at around 17x PE which was in line with the historical average.

Andrew Mouchacca, manager of the Flinders Emerging Companies fund, said: “The key outcome here is the attractiveness of the small cap sector from both a growth perspective, compared with large caps, and from a valuation perspective, particularly when compared with mid-caps.

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“It is also important to note that the earnings growth has been achieved off positive earnings growth for small caps in FY20, while large caps delivered negative growth in FY20.”

Over the last five years, the median small-cap manager had outperformed the Small Ords index by 1.3% per annum while the average large-cap manager had tended to perform in line with the index.

Average returns were 11.8% versus 10.5% per annum for the Small Ords index while large-cap ones had returned 7.9% versus index returns of 7.5%.

This was due to the higher dispersion of returns in the small-cap universe which meant a greater opportunity to add value and for managers to demonstrate their stockpicking ability.


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