Which Aussie Small Caps perform best against the index?
Ninety-seven per cent of funds in the Australian equities small caps space recorded higher returns than the S&P ASX Small Ordinaries benchmark over the last decade, although the index’s performance has steadily improved in that time period.
Research by Money Management found that the index performed surprisingly poorly over the ten years to 31 December, 2017, with negative returns of -0.03 per cent placing it in the 98th percentile for returns.
As the graph below illustrates though, the index’s performance improved over the last ten years, while the returns delivered by funds generally dropped in comparison. Over the last year, just 26 per cent of funds outperformed the benchmark.
While small cap funds are, by the nature of their investments, inherently volatile, some of the 74 funds focused on this area delivered consistently strong results across all time periods.
Eight funds (the OC Dynamic Equity, BT Wholesale Microcap Opportunities, Spheria Australian Smaller Companies, UBS Australian Small Companies, Pengana Emerging Companies, AMP Capital Small Australian Companies H and Macquarie’s Small Companies and Australian Small Companies funds) consistently beat the index over the last ten, five, three and one-year periods.
Seven additional younger funds had less recorded data, but had beaten the index across the time periods across which they had been in existence.
According to BT’s factsheet on its above fund, information technology was a key contributor to the index’s improved performance in the last year. It pointed to the performance of Isentia Group specifically as a cause of the benchmark’s growth, as it delivered a quarterly return of 43.3 per cent in the final quarter of the last financial year.
BT also highlighted that software was a notable pocket in which organic growth was not restricted, despite overall sluggish economic growth and limited potential for small cap growth.
The fund manager said that technology could equally cause uncertainty that impacts individual funds’ performances though, despite benefiting the index.
“The disruptive effects of new technology and industry entrants – both real and feared – continue to drive bouts of uncertainty,” the fact sheet said.
Many of the other funds to beat the index across all time periods also warned in their product disclosure statements that technological changes and developments were one of the key risks that small cap funds need to manage to be successful.
The Advance Australian Smaller Companies Multi Blend fund was the only one in the Australian equities small cap space to be consistently beaten by the S&P ASX Small Ordinaries index over the last ten, five, three and one-year periods. It had ranked in the bottom 20 per cent of funds for each period.
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