Investors should ignore the index, or risk missing out on ‘shooting stars’
Look for the small cap ‘stars’: NovaPort Capital
Small cap stocks are anything but ‘average’ so investors need to look beyond the the ASX Small Ordinaries Index and actively manage their small cap portfolios, or risk missing out on significant opportunities, according to boutique small-cap fund manager NovaPort Capital.
In a research paper released this week – ‘Concentrating on Small Companies’ – NovaPort found the performance of small companies over the past decade varied greatly – 38% suffering share price declines while conversely one in ten of the remaining 62% delivered a share price increase of over 1,000 per cent.
“What the analysis shows us is few small companies have delivered an ‘average’ return. In fact, a lot of them have been relatively disappointing investments. Over the last 10 years, for every company which exceeded our return criteria, there were two which lost money,” NovaPort Portfolio Manager Sinclair Currie said.
NovaPort believes its analysis demonstrates the ASX Small Ordinaries Index is a poor representation of the real growth opportunities, and confirms active management is essential to capture the true investment potential of small companies.
“It’s essential investors focus on a few good ideas rather than hug the index to realise the real potential for returns and growth in the sector,” Mr Currie said. “Small cap investing is very different to large cap investing. It covers a broad classification of businesses linked by only one common factor – size, making active management even more important.”
The S&P Indices Versus Active (SPIVA®) Index, which measures performance of actively managed funds against their relevant index benchmarks, reinforces this argument.
The 2013 mid-year SPIVA® scorecard indicates that over two-thirds (68 per cent) of Australian equity active funds were outperformed by the ASX 200 over a three year period, while the vast majority (82 per cent) of active small cap funds outperformed the ASX Small Ordinaries Index.
Significant number of “golden opportunities” for strong, stable growth
Despite the difficulties in picking winners, NovaPort Portfolio Manager Alex Milton remains upbeat about the meaningful number of small cap opportunities that provide for stable growth in the longer term.
“There are a significant number of companies who deliver returns in excess of our hurdle rate of around 15 per cent per annum or 50 per cent over three years. Investors who overlook small caps are passing up a golden opportunity for strong portfolio growth,” Mr Milton added.
“Successful small caps investing is about a few good ideas. We invest in small caps to find ‘shooting stars’, companies that will grow to become the next big thing, not stay in the index for years,” Mr Milton concluded.
