Global small caps leave Australia in their wake

Global small caps have almost doubled the return of Australian small cap funds, says Merrill Lynch managing director Maurice O’Shannassy.

“The hedged return of our global small caps fund was 64 per cent for the year ending February,” he says.

“This compares to a 38 per cent return for Australian small caps funds for the same period.”

Merrill Lynch launched both currency hedged and unhedged versions of its small caps funds in Australia last year. The unhedged version’s return was 32 per cent for the February period.

The benchmark return for the hedged version of the fund was 42 per cent and the unhedged product 10 per cent.

“We predicted the Australian dollar would rise so we put a currency hedged version of the product into the market,” Shannassy says.

“Currency has become such an important part of the decision-making process for investors and we are giving them a choice with hedged and unhedged versions.”

In previous years, Australian small caps have easily outperformed their international rivals, but last year was the first time the tables turned.

O’Shannassy argues advisers should now be seriously looking at including international small to medium caps in their clients’ portfolios to boost returns.

“In global equity funds, large cap stocks are a substantial part of the market and, as a result, the funds invest in the same stocks,” he says.

“Small caps give the manager the opportunity of investing in a wider range of stocks and performing better over a period of time.”

O’Shannassy says global small caps should now be part of portfolio construction by advisers, although the question remains as to how much of the fund to hedge or leave unhedged.

“If the client is going into global equities, small caps must be part of that portfolio,” he says.

“Some people would say small caps should be 10 per cent, others 5 per cent, but the final decision depends on the risk profile of the client.”