Active management critical for small cap investing

A passive large cap strategy has significantly outperformed a passive small cap strategy over the past 17 years according to a detailed analysis undertaken by Zenith Investment Partners in their Australian Small Companies Sector Review released this week. This has occurred on both on an absolute return and risk adjusted basis.

However, according to Quan Nguyen, Zenith Equities analyst, “the heightened level of excess returns generated by active small cap managers has offset this underperformance over the long-term. Small Cap funds have again delivered strong excess returns over the course of 2014. However, we have observed that the level of excess returns has reduced significantly relative to prior years”.

Over the 2014 calendar year, the median small cap manager rated by Zenith produced absolute net returns of 1.6%, while the S&P/ASX Small Ordinaries Accumulation Index delivered -0.76%, representing an outperformance of 2.4%. Over the three year period to 31 December 2014, the outperformance figure was an astounding 18.5% p.a.

The report also includes a look through analysis of sector and market cap segment exposures, details on the new funds added to the Zenith Approved List, and all fund ratings changes.

Summary of the Zenith 2015 Australian Small Companies Sector Review

From an initial universe of 59 products, 4 were rated “Highly Recommended”, 23 were rated “Recommended”, 9 were rated “Approved”, and 24 were “Not Rated”.

Additions to Zenith’s Approved List:

Rating Changes to Zenith’s Approved List: