Jason Coggins

AI infrastructure, electrification and under-researched companies are creating some of the strongest opportunities in Australian micro and small caps in years.

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

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.

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.

AI infrastructure driving the next investment cycle

Rather than investing directly in AI software developers, we have 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.

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. 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.

We also believe 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.

We’ve deliberately built these funds around investment performance rather than gathering assets under management. 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

The past financial year 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, portfolio decisions remain driven by bottom-up company analysis. Our investment process starts with identifying quality businesses. If the fundamentals change, we’ll adjust our portfolio accordingly.

Backing Australia’s next generation of leaders

For example, among the team’s strongest performers has been SKS Technologies (ASX: SKS), which we 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 we see 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 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 we 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, the Ellerston team 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, portfolio managers are focused on identifying businesses where improving fundamentals are yet to be reflected in share prices.

Looking beyond Australia’s largest companies

As a result, 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.

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.

By Jason Coggins, Head of Product Strategy at Ellerston Capital

The post The case for Australian micro and small caps has rarely been stronger – why Australia’s next generation of growth will be found beyond the ASX 20 appeared first on AdviserVoice.

David Wright

The Third Link Growth Fund is pleased to announce the appointment of David Wright to its Investment Committee, where he joins Chris Cuffe and Jason Coggins, further strengthening the Fund’s governance and investment oversight capabilities to ensure disciplined decision making.

Managed and founded by Chris Cuffe AO, the Fund stands out as a unique Australian equities fund-of-funds designed to generate strong, long term investment returns while channelling profits toward meaningful community outcomes. Employing an active multi-manager approach, the Fund invests with a line up of high quality Australian equity managers to optimise performance and diversify exposure across market segments.

David Wright brings more than 30 years of financial services experience in investment research and consulting. For the past 23 years, he was Co-Founder of Zenith Investment Partners, where he served as CEO and Investment Director. During his tenure, Zenith became one of Australia’s leading investment research and ratings firms, supporting advisers, institutions, and asset managers with investment insights and fund research.

Jason Coggins joined the Third Link investment committee in June 2025 and has more than 20 years of experience in financial services, spanning banking, private wealth, and asset consultancy.

Together with Chris Cuffe they will challenge the current investment thinking and ensure disciplined decision making.

“David’s breadth of experience and proven track record in investment research and consulting makes him a valuable addition to the Investment Committee. His insights and critical thinking will enhance our ability to deliver strong outcomes for our investors,” says Cuffe.

“The Third Link fund invests in underlying active managers who are purposefully attempting to beat their various indexes by really considering their capital allocations, rather than simply investing based on the market cap size.

“With the ongoing market uncertainty, many would say active managers have been hit hard in the last few months. However, I have seen similar market environments come and go. I believe active managers, particularly in Australian equities, do prevail as volatile periods subside,” Cuffe adds.

With approximately $140 million in funds under management, Third Link’s multi-manager Australian Equities Fund of Funds has been running for over 17 years and has delivered 8.9% per annum (net) since February 2012*.

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*Third Link Growth Fund Investor Webinar Recording – Third Link

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