Standard & Poor’s (S&P) 2011-2012 Sector Report for Australian Equity Small Cap Funds has found the group remains highly competitive with the average manager surpassing market performance benchmarks in recent years.
The review rated 44 headline funds, and 96 product offerings, and outlines key findings, themes and rating distribution of funds within the Australian equities – small cap peer group.
Seven funds were upgraded while two were downgraded. At the time of S&P’s review the rated peer group held an average of 32 per cent in non-index exposure.
The median manager returned close to 4.1 per cent per year net of fees above the Small Ordinaries benchmark, according to prior S&P reports.
The report notes that the smaller capitalised end of the market is dominated by active bottom-up managers employing less benchmark aware strategies compared to large-cap strategies.
Key person risk was shown to remain an issue, with senior portfolio manager pairings the basis for many small cap offerings.
"It is therefore important that senior members display a healthy working relationship and encourage strong team dynamics.
"During 2011 notable departures were seen in the UBS and Macquarie Bank teams, but there was stability across the remaining peer group which was underpinned by effective lock-in structures," said John Huynh, analyst at S&P Fund Services.
Three and four star rating categories dominate ratings distribution and support S&P’s view that the majority of funds in the peer group can deliver risk-adjusted returns in line with their investment objectives.
Only one fund – Aviva Investors Professional Small Companies – was awarded a five star rating. The report notes that a number of top-tier capabilities, including those managed by BT and Eley Griffiths, were constrained primarily due to concerns about capacity.
Research houses face challenges brought about by the small cap group’s capacity issue as high-rated offerings attract a greater share of investor flows, according to S&P.
"Highly rated offerings can quickly become hindered by strong growth in FUM, therefore we are naturally sensitive to awarding our highest rating to offerings which are at risk of being too large" said Huynh.
