(L to R): Richard Ivers & Mike Younger
Small cap stocks are finally enjoying a ‘justified’ turnaround, but investors need to be choosy as some sectors of the market run hot while others still look undervalued, according to Richard Ivers and Mike Younger, Portfolio Managers for the Prime Value Emerging Opportunities Fund.
The duo’s top quartile small cap fund was launched 10 years’ ago this month, in October 2015, and they say recent small cap outperformance versus large cap stocks only partially reverses five years of material under-performance.
“We see fundamental reasons why Small Cap out-performance could continue, driven by much stronger earnings growth and lower valuation multiples. We’re also seeing genuine bull market behaviour in certain sectors with some stocks running hot”, Richard Ivers said.
Mike Younger added: “In hindsight, the small cap industrials index bottomed in October 2023, just as the RBA implemented its final rate hike.
“Since then, this index is +49.7% versus the large cap index +38.6%, but has reversed only a small portion of the small cap relative under-performance over the last five years.”
Mike Younger said stronger earnings among smaller companies were an encouraging sign. “Share prices follow earnings, and there are many stocks where improved earnings are yet to show up fully in the share price, so there are currently some good buying opportunities.
“Macquarie Research estimates that small cap, ex-100 stocks will exhibit much stronger earnings growth over the next few years to 2028, while also trading on lower valuation multiples compared to large cap stocks.
“The smaller end of the market is far more diversified than the top 100 and we’re seeing strong opportunities right across the market, but also seeing potential for risk in smaller, speculative companies running hard”, Younger said.
While it seems small cap stocks should have further to run, Ivers and Younger say investors still need to be choosy and protect the downside when investing. “The last 10 years has shown us to ‘expect the unexpected’. It has also shown that market conditions can swing much faster than previous eras, and that brutal sell-downs can occur when momentum shifts.
“Even in good markets we need to consider portfolio construction, and managing the potential downside so that today’s gains can solidify into genuine long-term performance”, Mr Ivers said.
Keeping an eye on the big picture is key to small cap success, as consistent returns can be found in varied market conditions. “Small cap stocks are an area where good managers can make a difference and generate consistent returns across different markets”, Ivers said.
Younger added: “It’s a great market to be in because there’s always something interesting happening – even if one area of the market is disappointing there will be opportunities elsewhere. It’s the benefit of a broad and deep market of smaller companies, and it’s exciting to find those undervalued companies.”
The small cap Prime Value Emerging Opportunities Fund has outperformed the Small Industrial Accumulation Index for each of the last eight years, and has delivered 11.7% per annum net of fees to investors since inception in October 2015 to 30 September 2025.
It is rated Highly Recommended by Zenith, Recommended by Lonsec, Recommended by Genium (class B) and is available on Netwealth, uXchange, Mason Stevens, Hub24, BT Panorama, Praemium, AMP North and IconiQ.
Prime Value Asset Management was founded in 1998 and is part of an investment group including Shakespeare Property Group, managing circa $3 billion in equities, income securities, direct property and alternative assets.
For more information please contact:
Richard Ivers
Portfolio Manager
Prime Value Asset Management
Phone: 0432 925 146
Email: rivers@primevalue.com.au
David Manallack
Manallack PR
Phone: 0407 334 938
Email: david@manallack.com.au