Small cap market to cool like large caps

The head of a specialist small cap hedge fund manager believes the small cap market in the short-term will continue to deliver solid returns, but not to the extent witnessed over the past few years.

Smallco managing director Rob Hopkins said: “Price earnings ratios are not extortionately high. Any of the economic forecasts we look at seem to suggest that we still don’t have reasonably solid growth both domestically and internationally, so we think that while you won’t get the same sort of returns you’d have got over the last few years in terms of the market, you’re probably going to muddle through it, with the market going up 5 or 10 per cent per annum, which is still nice and positive,” he added.

Hopkins has predicted the small cap market will deliver underperformance some time in the near future, but was not sure exactly when this would be.

“This situation has been in existence for the last two years. At some stage small caps will under-perform relative to the market,” he said.

However, Hopkins warned that when small caps under-performed the market it would be more pronounced than that of its large cap counterpart.

“Usually it happens when there’s a bear market, so you get a double whammy affecting small companies because you get the market coming down and then small companies under-performing the market; so when it happens it’s quite nasty,” he explained.

Skandia research manager Jodie Fitzgerald said the platform provider was already beginning to see a drop off in the interest shown from investors in its small company offering.

“The flows into the small cap product have started to stem off over the last few months, and that’s probably a reflection of the market. I think a lot of people are saying it’s been a good time in small caps and it might be time to rotate out,” she said.