Small cap sector restructures as resource stocks lose favour

Resource stocks are dragging back the performance of the small cap sector but their poor performance is leading to a necessary restructure of the index according to research house Lonsec.

The research house stated that resource and mining services companies were the main players dragging on the small capitalisation market with their losses taking the focus of strong results in other areas and the restructure of the small cap sector.

In data released by Lonsec, during 2014 the ASX S&P Small Ordinaries index recorded a 3.8 per cent fall while small resources companies fell by 28.4 per cent overshadowing the 2.8 per cent gain made by small industrials in the same period.

Lonsec analyst Nick Thomas said the poor performance of resources was "a well-worn theme for small caps, persisting for the past four years. More recently, the main drags within the sector have been iron ore, gold and energy".

The poor fortunes of these stocks did have an upside in that as their value has fallen so has their weighting within the index back to "a healthier balance of companies and industries" according to Thomas.

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"They have been replaced by increases in consumer discretionary stocks, financials and, to some extent, healthcare and telecommunications. The number of new public offerings in the past two years has also helped this trend. Overall the balance and diversity within the index now looks far healthier,'' he said.

He said fund managers had already started to move away from the resource companies in the small cap sector and those which were rated by the research house had outperformed the market on average by 6 percentage points to produce a 2.2 per cent gain after fees, compared with 3.8 per cent loss for the index.