Rudi's View | Jul 12 2018
In this week's Weekly Insights (this is Part Two):
-The Triumph Of Quality
-Share Market Sweet Spot
-Rudi On TV
-Rudi On Tour
Share Market Sweet Spot
By Rudi Filapek-Vandyck, Editor FNArena
One of the persistent misconceptions among Australian investors is that better investment returns await those who venture into small caps, but no such conclusions have ever been drawn from thorough data analysis.
It wasn't that long ago that I compared the performance of various fund managers specialising in large and small caps, and that (admittedly rough) comparison generated similar results as putting raw share prices together.
In contrast to, say, the USA, there is no consistent outperformance of small caps over large caps in Australia. The share market does have its periods when one is very much favoured over the other. And unless you have been living under a rock lately, we are currently in a period when large caps are the laggards, and many investors have redirected their attention to small cap stocks in response.
But are smaller cap stocks the best location for achieving superior returns? What about the higher risk profile?
Turns out, the sweet spot in the Australian share market is situated between positions 51-100 of the ASX200. Throughout the years of reading copious volumes of market research and data analysis, I have come across this conclusion a number of times. Analysts at Citi (if my memory serves me correctly) highlighted this not so long ago, and last week it was the turn of Colonial First State, which is also responsible for the chart below.
We can clearly see how large caps (ASX50) performed considerably better than small caps (Small Ords) over seven and ten year horizons, but the three and five year performances are in favour of small caps, in particular the past three years. But no matter what time horizon we choose, the outperforming market segment is always the ASX Mid Cap 50, which translates into numbers 51-100 of the ASX200 index.
This should come as no surprise. Strong performers including BlueScope Steel ((BSL)), a2 Milk ((A2M)), Seek ((SEK)), Challenger ((CGF)), WiseTech Global ((WTC)), Orora ((ORA)), and Reliance Worldwide ((RWC)); they are all part of this group, as are a number of stocks that haven't performed so well lately, including Harvey Norman ((HVN)), Link Administration ((LNK)), and Fletcher Building ((FBU)).