End of resources boom make small cap plays harder
Active small cap fund managers have outperformed their index for the decade but are expected to find similar performance harder to replicate as the resources boom falls away and the composition of the small cap sector moves back toward industrial stocks.
In a review of the small cap sector Morningstar senior analyst, manager research Mark Laidlaw said small cap managers were also competitive against the wider market over the long term due to the smaller end of the market spectrum being less efficient and more conducive to generating excess returns.
However he warned investors that the small cap market had a very different composition than five years ago when the resources boom was at its fullest and resources related stocks made up nearly half of the Australian small-cap environment.
Since then the small cap sector has rebalanced to include financials, consumer-related and industrial stocks with Laidlaw stating that small cap managers were still able to outperform their index but this required active management to avoid pitfalls associated with shifts in the sector.
"One side-effect of this shifting market is that it has proved to be a boon for active small-cap managers. Every manager we cover has beaten the S&P/ASX Small Ordinaries Accumulation index over three, five and 10 years annualised to the end of August 2014," Laidlaw said.
"It has been simply a case of avoiding the multitude of falling knives in the sector and looking for opportunities in other parts of the market."
However he said small cap managers would have to work harder to generate the same returns going ahead due to the sector changes mentioned above.
"We expect small-cap managers will find it more difficult to generate the levels of excess returns enjoyed by investors over the past few years for a number of reasons."
"The performance differential between resources and industrials is showing clear signs of narrowing. Expectations are strengthening that the resources sector has bottomed and this is reflected by its index weighting stabilising in the past year."
AUTHOR
Jason Spits
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