A Zenith Investment Partners review of the small companies sector has delivered a relatively low number of recommended ratings, while many managers are placing increased emphasis on environmental, social and governance (ESG) factors.
The review returned just 12 recommended and four highly recommended ratings out of an initial universe of 46 funds. Zenith said while this may appear low given the large number of small, mid and micro funds available, Zenith only undertook due diligence where it believed there was a high likelihood of at least a recommended rating.
Zenith noted the S&P Small Ordinaries Index was down 21.4 per cent for the 12 months to 31 December 2011, meaning managers were operating in a tough environment.
Managers are positioning themselves for muted growth over the next 12 months, with earnings downgrades expected to outnumber earnings upgrades, Zenith stated.
In the small cap space, the Celeste Australian Small Companies Fund, the Fairview Emerging Companies Fund and the Ironbark Karara Australian Small Companies Fund all received the top rating.
In the case of Fairview and Ironbark, it represented their first appearance in Zenith’s top category, with the upgrade due to Zenith’s increased confidence in each fund’s "highly experienced research team and in-depth research process".
The other top rating was Ausbil’s Australian Emerging Leaders Fund (mid-cap).
Zenith senior investment analyst Bronwen Moncrieff noted an increased emphasis on ESG factors – a trend she said was likely to continue.
Managers have historically focused on governance factors without applying the same rigour to environmental and social factors, but managers in this review formally incorporate all three into their research, security selection and portfolio management processes, she said.
Several managers on the recommended list are also signatories to the United Nations Principles of Responsible Investment Initiative, she added.
The country’s two-speed economy has placed an increased relevance on the resources sector and changed the way managers view the sector from a portfolio construction standpoint, Moncrieff said.
"Several funds covered in the review already have in-house expertise in the resources sector, but there has been a definite trend to ramp this up," she said.
Managers have either added resources specialists to the investment team or are looking for candidates, and some have even created a resources sub-portfolio within the fund, she said.
