Avoid small cap index hugging
Investing in an index was like looking in a rear vision mirror when the aim of investing should be to look forward, according to a boutique Australian equities manager.
NovaPort portfolio manager Sinclair Currie said benchmark investing had its place but for investors seeking dividends and growth it was not the best way to invest.
NovaPort, which specialises in small and micro-cap listed companies and currently offers a small cap and a microcap fund to retail and wholesale investors, has conducted research around the performance of the sector.
It found the performance of small companies over the past 10 years was spread across the spectrum, with 38 per cent of small cap stock prices falling while only one in 10 of the remaining 62 per cent of stocks had a share price increase of more than 1000 per cent.
While these stocks were the outliers, Currie said that anyone invested in the small cap sector by way of the index saw nearly 40 per cent of that index lose money over a 10-year period.
"Investors are not looking for small companies to get even smaller and these return figures confirm the case for active management to gain reasonable returns from the small cap sector," Currie said.
He also stated the analysis showed that few small cap investments delivered an average return and that over the last 10 years for every company which exceeded NovaPort's return criteria, there were two companies that lost money.
As a result of its research, NovaPort said the ASX Small Ordinaries Index was a poor representation of the real growth opportunities in the small cap sector.
Currie stated it was useful for investors to examine the area for potential returns and growth instead of hugging the index, since small cap investing differed to large cap investing.
"It covers a broad classification of businesses linked by only one common factor — size — making active management even more important," Currie said.
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