The review rated 44 headline funds, and a total of 96 product offerings. Seven funds were upgraded and two were downgraded. The report finds that the group remains highly competitive, with the average manager continuing to deliver performance well ahead of market benchmarks in recent years. 

Over the past three years the median manager returned close to 4.1% per year (net of fees) above the Small Ordinaries benchmark. The report also notes that the smaller capitalised end of the market is dominated by active bottom-up managers employing approaches that are less benchmark-aware compared to large-cap strategies. At the time of S&P’s review the rated peer group held an average of 32% in non-index exposure. 

Senior portfolio manager pairings form the backbone of most small-cap offerings, and highlight that key person risk remains prevalent across the sector. “It is therefore important that senior members display a healthy working relationship and encourage strong team dynamics,” said John Huynh, analyst at S&P Fund Services. “During 2011 notable departures were seen in the UBS and Macquarie teams, but there was stability across the remaining peer group which was underpinned by effective lock-in structures,” Mr Huynh said. 

The ratings distribution is concentrated in the four- and three-star rating categories, reflecting S&P’s view that the vast majority of funds in the peer group are capable of delivering risk-adjusted returns in line with their investment objectives. Only one fund, Aviva Investors Professional Small Companies, was awarded a five-star rating. The report notes that a number of top-tier capabilities, including those managed by BT and Eley Griffiths, were constrained primarily due to concerns about capacity.

The capacity issue within small-caps introduces a number of challenges for research houses, given the propensity for higher-rated offerings to attract a greater share of investor flows. “Highly rated offerings can quickly become hindered by strong growth in FUM, therefore we are naturally sensitive to awarding our highest rating to offerings which are at risk of being too large” said Mr Huynh.

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