Why Australia’s next generation of growth will be found beyond the ASX 20

While Australia’s largest listed companies continue to dominate investor portfolios, Ellerston Capital believes the country’s most compelling future growth opportunities are increasingly being found further down the market-cap spectrum.

According to James Barker and Jack Briggs, Portfolio Managers of the Ellerston Australian Micro Cap Fund, and Ellerston Australian Emerging Leaders Fund (respectively), structural themes including artificial intelligence (AI), electrification and digital infrastructure are driving earnings growth in businesses largely absent from the S&P/ASX 20.

The opportunity comes as Australia’s economic growth outlook remains subdued, forcing investors to look beyond traditional large-cap exposures in search of companies capable of delivering sustained earnings growth.

“The businesses building the infrastructure behind AI are where we’re finding some of the most exciting opportunities locally,” says Barker.

“Investors can gain very little exposure to these themes through the S&P/ASX 20. Many of the companies benefiting most from these structural shifts are operating in the micro and small-cap universe.”

The Ellerston Australian Micro Cap Fund has demonstrated the strength of this approach, returning 27.8% over the 12 months to 31 May 2026, outperforming the S&P/ASX Small Ordinaries Accumulation Index by 16.6%. Since inception in May 2017, the Fund has delivered 16.0% per annum, compared with 7.2% per annum for its benchmark.

AI infrastructure driving the next investment cycle

Rather than investing directly in AI software developers, Ellerston has focused on businesses enabling the rapid expansion of Australia’s digital infrastructure.

“Companies including

• SKS Technologies (ASX: SKS),
• Mayfield Group Holdings (ASX: MYG),
• Southern Cross Electrical Engineering (ASX: SXE) and
• GenusPlus Group (ASX: GNP)

have all benefited from increasing investment in hyperscale data centres, power infrastructure and electrical networks,” says Barker.

“Order books across many of these businesses have expanded significantly, providing greater earnings visibility than has historically been available in the sector.

“The market is still underestimating the duration of this investment cycle,” says Barker. “We’re seeing project pipelines extending into 2028 and 2029, which gives these businesses far stronger revenue visibility than they had only a few years ago.”

The Ellerston team also believes Australia’s ongoing electrification program, including upgrades to transmission infrastructure, renewable energy projects and increased electricity demand from data centres, will continue supporting earnings growth for many years.

Finding opportunities before the market does

Unlike Australia’s largest companies, many micro and small-cap businesses receive little or no broker research coverage, creating opportunities for specialist active managers.

Rather than relying on macroeconomic forecasts, the investment team employs a research-intensive, bottom-up approach to uncover opportunities across Australia’s under-researched micro and small-cap universe. Frequent company meetings, deep industry analysis and rigorous fundamental research are central to identifying businesses capable of delivering long-term earnings growth before they become widely recognised by the market.

Barker says maintaining a capacity-constrained strategy remained central to the investment philosophy.

“We’ve deliberately built these funds around investment performance rather than gathering assets under management,” he says.

“Being capacity constrained allows us to invest in businesses much earlier in their growth journey and build meaningful positions before they become too large for many institutional investors.”

The approach has also enabled the team to identify emerging companies benefiting from long-term structural themes before they become widely recognised by the broader market.

Stock picking, not macro forecasting

FY26 demonstrated how quickly market leadership can change. Early in the financial year, lower interest rates and improving housing activity supported consumer-facing businesses such as Autosports Group (ASX: ASG) and Cedar Woods Properties (ASX: CWP). However, three consecutive interest rate increases later in the year shifted investor sentiment, prompting the team to reduce exposure to more economically sensitive businesses.

Rather than attempting to forecast macroeconomic outcomes, Ellerston says portfolio decisions remain driven by bottom-up company analysis.

“Our investment process starts with identifying quality businesses,” says Briggs. “If the fundamentals change, we’ll adjust our portfolio accordingly.”

Backing Australia’s next generation of leaders

Among the team’s strongest performers has been SKS Technologies (ASX: SKS), which Ellerston first invested in during July 2024 at around $1.30 per share. The company has since benefited from surging demand for hyperscale data centres and AI infrastructure, with increasing project wins driving substantial earnings growth.

Another high-conviction holding is Wagners Holding Company (ASX: WGN), where Ellerston sees a multi-year investment opportunity supported by Queensland’s population growth, infrastructure spending and preparations for the Brisbane 2032 Olympic Games. The company’s Composite Fibre Technologies business also provides additional exposure to Australia’s electrification rollout through advanced utility poles and transmission infrastructure.

Long-term holding Servcorp (ASX: SRV) represents a different type of opportunity. The founder-led flexible workspace business has more than doubled earnings over the past three years while maintaining a strong balance sheet, illustrating the team’s preference for companies capable of compounding earnings over extended periods.

Another example is Shape Australia (ASX: SHA), which Ellerston identified as a misunderstood business. While often categorised alongside traditional construction companies, the team recognised its lower-risk refurbishment and fit-out model, strong repeat customer base and growing exposure to sectors including education, healthcare and data centres.

The next opportunity may be hiding in plain sight

While AI infrastructure and electrification remain long-term investment themes, Ellerston believes the next wave of opportunities may emerge from sectors that have recently fallen out of favour.

Industrial companies, selected financials and consumer discretionary businesses have all experienced meaningful valuation compression following interest rate increases.

Companies such as Plenti Group (ASX: PLT) and Baby Bunting Group (ASX: BBN) are now attracting increased research attention from the team as valuations become increasingly compelling.

Rather than attempting to identify the exact market bottom, Barker and Briggs are focused on identifying businesses where improving fundamentals are yet to be reflected in share prices.

Looking beyond Australia’s largest companies

For Barker and Briggs, the case for Australian micro and small caps has rarely been stronger.

After several years of lagging large caps, Australian micro and small caps are trading below their long-term relative valuation against the ASX 200. Combined with strengthening structural growth themes, the sector presents an attractive entry point for long-term investors.

Barker says, “Investors looking beyond the ASX 20 aren’t simply buying smaller companies. They’re accessing businesses exposed to some of the fastest-growing parts of the Australian economy. For active investors prepared to do the research, that’s where we believe many of Australia’s future market leaders will be found.”