Small caps sector reaches peak

The small caps sector has reached its peak and will be unable to sustain its current high level of performance, a new report has warned.

The report by research group van Eyk found small cap managers are continuing to outperform the index.

Over the past three years, the average manager returned 21.3 per cent, compared to 12.2 per cent for the Small Caps Index. Over the 12 months to July 2004, the average small cap manager returned 32.5 per cent.

However, the report warns that returns may have peaked, with lower performance expected going forward.

Head of fund manager research and ratings at van Eyk, Suzanne Tavill says: “The Small Ords has had a strong run and we have now been saying the sector is broadly fully valued. We believe the level of total performance from both the managers and the index will probably be lower going forward.”

Tavill says many small caps funds are growing too large and this could have a detrimental impact on performance.

Of the 12 small cap funds rated as ‘recommended’ by van Eyk, five have stopped taking new money from investors.

“Small cap funds often become a victim of their own success — if a fund attracts strong inflows, they may get too big, which detracts from performance because they can’t act as quickly on stock decisions,” Tavill says.