During its latest review, Lonsec has upgraded the NovaPort Microcap Fund from ‘Recommended’ to ‘Highly Recommended’. For the fourth consecutive year, it has retained a ‘Highly Recommended’ rating for its Wholesale Smaller Companies Fund.

Both funds are managed by NovaPort’s co-portfolio management team of Alex Milton and Sinclair Currie, who began working together in September 2010 and have over 40 years’ combined industry experience. In the recent review, Lonsec said it considers the co-PM team to be among the most impressive in the small cap sectors.

The performance of the funds has been strong over the long term, with the Wholesale Smaller Companies Fund delivering 12.2% p.a. (after fees) over the five year period to February 2017 realising excess returns of 10.4% p.a. versus the benchmark and the MicroCap Fund generating 11.4% p.a. after fees over the same period (9.6% p.a. above index).

NovaPort targets companies with potential for 50% upside over three years in a concentrated portfolio, using a high-conviction, benchmark-unaware strategy.

Mr Milton said the rating highlighted both funds’ ability to offer investors the benefits of diversification while also improving long-term returns.

“We are pleased to have both funds recognised for generating quality returns. Investors are seeking capital growth at relatively low risk in a market characterised by low rates and investor portfolios dominated by blue-chip large caps. And we find smaller companies with real long term growth opportunities will continue to deliver some exciting performance for investors regardless of broad economic volatility.

“Our bottom-up, long-term approach is the key to identifying star performers that will meet and exceed expectations. Well managed, quality small caps are well positioned to exploit new and expanding markets and NovaPort favours stock with a number of common elements – sound balance sheets, strong management, favourable industry position and innovative, and differentiated products to meet market demand,” Mr Milton said.

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Look for the small cap ‘stars’: NovaPort Capital

Small cap stocks are anything but ‘average’ so investors need to look beyond the the ASX Small Ordinaries Index and actively manage their small cap portfolios, or risk missing out on significant opportunities, according to boutique small-cap fund manager NovaPort Capital.

In a research paper released this week – ‘Concentrating on Small Companies’ –  NovaPort found the performance of small companies over the past decade varied greatly – 38% suffering share price declines while conversely one in ten of the remaining 62% delivered a share price increase of over 1,000 per cent.

“What the analysis shows us is few small companies have delivered an ‘average’ return. In fact, a lot of them have been relatively disappointing investments. Over the last 10 years, for every company which exceeded our return criteria, there were two which lost money,” NovaPort Portfolio Manager Sinclair Currie said.

NovaPort believes its analysis demonstrates the ASX Small Ordinaries Index is a poor representation of the real growth opportunities, and confirms active management is essential to capture the true investment potential of small companies.

“It’s essential investors focus on a few good ideas rather than hug the index to realise the real potential for returns and growth in the sector,” Mr Currie said. “Small cap investing is very different to large cap investing. It covers a broad classification of businesses linked by only one common factor – size, making active management even more important.”

The S&P Indices Versus Active (SPIVA®) Index, which measures performance of actively managed funds against their relevant index benchmarks, reinforces this argument.

The 2013 mid-year SPIVA® scorecard indicates that over two-thirds (68 per cent) of Australian equity active funds were outperformed by the ASX 200 over a three year period, while the vast majority (82 per cent) of active small cap funds outperformed the ASX Small Ordinaries Index.

Significant number of “golden opportunities” for strong, stable growth

Despite the difficulties in picking winners, NovaPort Portfolio Manager Alex Milton remains upbeat about the meaningful number of small cap opportunities that provide for stable growth in the longer term.

“There are a significant number of companies who deliver returns in excess of our hurdle rate of  around 15 per cent per annum or 50 per cent over three years. Investors who overlook small caps are passing up a golden opportunity for strong portfolio growth,” Mr Milton added.

“Successful small caps investing is about a few good ideas. We invest in small caps to find ‘shooting stars’, companies that will grow to become the next big thing, not stay in the index for years,” Mr Milton concluded.

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