Boutique managers best for small caps: Lonsec
Institutionally backed boutique fund managers are the best bet in the small cap space, despite their inherent 'key person risk', says Lonsec senior investment analyst Sam Morris.
As part of Lonsec's annual review of the small cap sector, Morris said the "boutique with backing" model had a number of advantages.
"Key investment staff gain equity in the business, increasing alignment with investors and potentially their motivation for success," Morris said.
The outsourcing of compliance, administration and distribution to the supporting backer also leaves the investment team free to do their job, he added.
While the success of the 'boutique with backing' model relies on "the investment skill and experience of key individuals", Lonsec believes it is a risk worth taking, said Morris.
The 2011 year was a challenging one for small cap companies. The S&P/ASX Small Ordinaries Accumulation Index returned -23.4 per cent for the year, although the Lonsec Small Cap Peer Group outperformed the index by 8.3 per cent for the calendar year.
Morris pointed to the outperformance of the Lonsec peer group as evidence of the benefits of active management in the small cap space.
"A well regarded small cap manager is likely to outperform the index through the cycle," he said.
Three funds were upgraded from 'recommended' to 'highly recommended' as part of the review:
- Aviva Investors Small Companies Fund,
- Celeste Australian Small Companies Fund, and
- Perennial Value Smaller Companies Trust.
Macquarie Australian Small Companies Fund was downgraded from 'fund watch' to 'redeem' following a number of departures, including the fund's portfolio manager Neil Carter.
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