Rudi's View | Jul 12 2019
In this week's Weekly Insights (this is Part Two):
-This Too Shall Pass
-The Other Story About Small Caps
-Afraid About Growth: Nearmap
-Who Invests In Negative Yielding Bonds?
-Rudi In The Australian
-Rudi On Tour
The Other Story About Small Caps
By Rudi Filapek-Vandyck, Editor FNArena
This truly deserves a dedicated story, based upon more detailed in-depth research, but for now I have to restrict myself to merely pointing out one of my pet observations from the past 17 years: small cap investments can generate large, above average returns, but on average, small caps do not outperform in Australia, despite the fact this is convincingly the case in overseas markets like the USA.
On my non-researched hunches, factors in play locally are smaller average company size (what is mid-cap in Australia is merely small cap in the USA), more mining companies and explorers, different dynamics as Australia is a much smaller economy, and, equally important, a much smaller share market with limited liquidity, in particular during times of economic stress. I have a suspicion the big overweight in local indices towards large banks and resources also plays a role.
Whatever the case, investors shouldn't automatically assume there are no outsized gains to be achieved from large cap names in Australia, with the smaller end of the share market the automatic magnet for investors looking for large upside on offer. The statistics, however, tell a different story.
Below is a recent chart I picked up from Colonial First State. I'd wager the big gap in performance between the Top100 in Australia and the tiddly piddly small cap stocks grouped together in the Small Ordinaries has as much to do with CSL, Brambles, REA Group, the banks, iron ore and Telstra as it has to do with the unusually strong performance for Goodman Group and Transurban and the likes, plus the fact that the investment sweet spot in Australia is situated in between positions 51 and 100 of the ASX200.
For those not familiar with the composition and rankings of the ASX200, the aforementioned sweet spot includes names such as Xero, Fisher & Paykel Healthcare, Magellan Financial, WiseTech Global, ResMed, Afterpay Touch, IDP Education, and many other fast growing upcomers. These have been the little engine that could for the Australian share market for a long time now.
In the USA, each of these names would be part of the small caps index. In Australia, all are part of the ASX100, which is outside the typical hunting ground for small cap funds managers.
The second chart, from Ord Minnett, provides more detail into how small caps in Australia performed throughout fiscal 2019.
Afraid About Growth: Nearmap
Australian investors are not used to dealing with structural growth companies. Hence why the likes of CSL and REA Group do not feature prominently in most investment portfolios (while they most definitely should).