According to the latest review of small companies by leading research house Lonsec, the plunging value of resource companies has had a positive impact on the structure of the small cap market, despite being the major reason the sector has underperformed during recent years.

As the value of resource stocks fall, so too does their weighting within the index, Lonsec analyst Nick Thomas said. “This is leading to a healthier balance of companies and industries within the popular sector,” Mr Thomas said.

“The poor performance of resources has become a well-worn theme for small caps, persisting for the past four years. More recently, the main drags within the sector have been iron ore, gold and energy companies, this has also flowed through to put pressure on companies within the mining services sector,” he said.

During 2014, The ASX S&P Small Ordinaries index recorded a 3.8 per cent fall, however, this was dominated by a 28.4 per cent plunge by small resources companies, which wiped out a 2.8 percent gain by small industrials.

Funds rated within the Lonsec small cap peer group, however, had already shown a strong bias away from resource companies last year. According to its latest review of the small companies fund sector, Lonsec-rated managers outperformed the market on average by 6 percentage points to produce a 2.2 per cent gain after fees, compared with the index 3.8 per cent loss.

“Fund managers who have shown strong industrial stock selection, as well as avoiding the blow ups in mining and mining services, have produced solid returns during the past three years,’’ Mr Thomas said.

The reweighting of the index as resource stocks fall from grace is also having a more positive impact on the wider small cap market sector.

“The obvious impact from the disparity between resources and industrials is that the materials and energy sectors now make up a far smaller proportion of the benchmark index,” Mr Thomas said. “They have been replaced by increases in consumer discretionary stocks, financials and, to some extent, healthcare and telecommunications.

“The number of new public offerings in the past two years has also helped this trend. Overall the balance and diversity within the index now looks far healthier,’’ he said.

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