Small caps stage impressive comeback

The Small Cap Australian Equities sector may have performed impressively through 2009 to recover many of the losses experienced during the depths of the global financial crisis, but only one fund — the UBS Australian Small Companies Fund — has fully recovered its losses.

That is the bottom line of the latest Lonsec Small Cap Australian Equity Sector Review, which has found that the UBS fund fully recovered to the level it achieved at the peak of the market in October 2007.

While acknowledging the strong recovery of the small caps sector through 2009, Lonsec noted that the drawdown in the market from its October 2007 peak to the February 2009 trough was a negative 60.8 per cent.

The Lonsec analysis said that a factor in the UBS fund’s recovery was that its drawdown over the period had only been negative 43.6 per cent, with the bulk of managers suffering drawdowns in the low 50 per cent range.

The strong recovery in the sector meant that Lonsec did not find a need to downgrade any funds, although two funds — the AMP Small Companies Fund and the OC Premium Equity Fund — were placed on ‘fund watch’, largely as a result of internal restructures and personnel changes.

The funds to gain Lonsec’s coveted ‘highly recommended’ rating in the survey were Eley Griffiths Group Small Companies Fund, Ausbil Australian Emerging Leaders Fund and Pengana Emerging Companies Fund.

The Lonsec review analysis made clear that its ratings of a large number of funds in the sector had been coloured by personnel changes, and nominated the Macquarie Australian Small Companies Fund as having “endured the most instability of any team in the past two years, with significant staff turnover, fundamental changes to team structure and changes to investment process”.

The analysis stated that despite these issues, Lonsec had decided to upgrade the fund as a recognition that a large number of the changes had been significant enhancements.