Small caps prosper in volatile times: Lonsec

Australian small caps are beating the S&P/ASX 200 despite the continuing market volatility, research house, Lonsec reports.

Lonsec general manager of equities, Peter Green, revealed the S&P/ASX Small Ordinaries Index outperformed the S&P/ASX 200 for the first time in four years, in 2015, delivering a return of 10.2 per cent compared with 2.6 per cent.

"Finally, after a series of negative returns, Australian small caps have turned the market on its head," he said. "What we have seen from small caps as a sector is very significant, especially given the fact that Australian equities entered bear market territory in early 2016.

"Small caps have provided better insulation from the recent selloff, which is not what you would usually expect. Typically, smaller companies are at the front line when it comes to sustained equity value declines. In this case, growth from industrial shares have bolstered small cap indices, and fund managers have been able to provide better returns for investors."

While fund managers have benefited from growth in the small cap sector, Green warned significant risks remain in equity markets.

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"Obviously volatility continues to be the main challenge for investors," he said.

"We think 2016 will be a real test for small cap fund managers to see whether they can sustain these returns.

"While growth was impressive in 2015, fund managers will need to be vigilant and ensure that the investment case for individual shares continues to stack up. As always, research capacity and fund processes will be key."