FMOTY 2023: Spotlight on Aussie Small Cap Equities

The Australian Small Cap Equity fund finalists have expressed their investment outlooks in the lead-up to Money Management’s 2023 Fund Manager of the Year Awards.

The three finalists in the category are:

• Spheria Australian Smaller Companies Fund
• First Sentier Wholesale Australian Small Companies Fund
• OC Dynamic Equity Fund

Click here to view the full list of finalists.

Contrasting global markets, smaller companies within Australia are presenting resilient and attractive investment opportunities despite macro-economic challenges.

The Spheria Australian Smaller Companies Fund outperformed the S&P/ASX Small Ordinaries Accumulation Index on a three month, one year, and five-year time frame to 30 April 2023.

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“This strong performance can be attributed to our disciplined investment process, which has explicit risk controls and focuses on identifying companies with strong and sustainable levels of free cash flow,” said Matthew Booker, co-founder and portfolio manager at Spheria Asset Management.

The fund also avoids bubbles and exuberance in the small-cap space to ensure a more long-term focus.

“It has been a tough period for just about all asset classes and the small-cap space has been no exception, but from a bottom-up fundamental point of view we are seeing great opportunities in Australian small caps,” Booker continued. 

Greater resilience and outperformance during market recoveries are a key feature of Australian smaller companies, allowing Spheria to eye out businesses that are underappreciated by the broader market.

Dawn Kanelleas, head of Australian small and mid-cap companies at First Sentier Investors, observed the First Sentier Wholesale Australian Small Companies Fund’s delivery of consistent absolute returns.

“The fund’s absolute and relative performance historically has been strong over the medium and long-term, with double-digit absolute returns over three, five, seven and 10 years,” he said.

The asset management firm favours a bottom-up approach and had diversified exposure across industry sectors at all times.

“By favouring companies with sustainable competitive advantages, strong financials, quality management and predictable earnings, we seek to deliver superior returns and aim to protect from downside risks during all market cycles,” Kanelleas added.

The OC Dynamic Equity Fund had a consistent history of success in managing small-cap investments. 

“The fund’s commitment to rigorous research, prudent risk management, and astute investment strategies has resulted in significant value creation for its investors,” said Rob Frost, head of investments and executive director at OC Funds Management.

As of 30 April 2023, the fund was up by 3.7 per cent. This contrasted the S&P/ASX Small Ordinaries Accumulation Index and the S&P/ASX Small Industrials Accumulation Index, which are down by negative 9.4 per cent and 7.6 per cent, respectively. 

Additionally, the fund returned 16.5 per cent p.a over a three-year period, well ahead of domestic small-cap indices.

Frost believes the time to rotate back towards quality growth companies, which could increase their earnings against the backdrop of a slowing economy, was quickly approaching. 

“Over the past four months, we have been increasing our exposure to high-quality growth businesses, with good levels of liquidity, with the interest rate cycle likely nearing a peak,” he told Money Management.

“History suggests that small-cap stocks are likely to lead the market recovery and our fund has an excellent track record of generating alpha for our clients once the market rebounds.”

Winners of the 2023 Fund Manager of the Year Awards will be announced on Thursday 22 June 2023 at a black-tie gala awards ceremony at The Star in Sydney.

Click here to buy tickets to the awards ceremony.