Zenith reviews small caps sector

Convinced over time they will deliver returns in excess of the benchmark, researcher Zenith Investment Partners has added five products from the small companies sector to its recommended list.

The following five products were added:

• Ausbil — Aust Emerging Leaders Fund (highly recommended);

• Eley Griffiths Group Small Companies (highly recommended);

• Next Financial Eley Griffiths SMA (highly recommended);

• Patriot Small Companies Fund (recommended); and

• Smallco Investment Fund (recommended)

The five products achieved representation on the list from an initial universal group of 30.

One of the key factors assessed as part of the review was the managers’ funds under management (FUM).

In Zenith’s opinion, none of the funds mentioned have issues with excessive FUM.

Zenith claimed that large levels of FUM could potentially hinder the ability of a fund manager in the small companies sector to outperform the market.

That is because fund managers could find it difficult to enter and exit portfolio positions without influencing share prices and, as a result, the average price of a stock sale could be lower than desired, negatively impacting on performance.

In addition, high levels of FUM force fund managers to take substantial shareholdings in companies, which removes their ability to quietly build up or sell down a stock position.

Zenith senior investment analyst Glen Franklin said closing products to new investments at a level of 0.75 per cent of the capitalisation of the Small Ordinaries index, or below, was a prudent strategy.

“This should limit performance degradation and allow some scope for further growth through compounded returns,” he said.

“Although higher turnover and more concentrated funds will have a capacity potentially far lower than this.”