Rudi’s View: Afterpay Touch, Nearmap, And a2 Milk

Always an independent thinker, Rudi has not shied away from making big out-of-consensus predictions that proved accurate later on. When Rio Tinto shares surged above $120 he wrote investors should sell. In mid-2008 he warned investors not to hold on to equities in oil producers. In August 2008 he predicted the largest sell-off in commodities stocks was about to follow. In 2009 he suggested Australian banks were an excellent buy. Between 2011 and 2015 Rudi consistently maintained investors were better off avoiding exposure to commodities and to commodities stocks. Post GFC, he dedicated his research to finding All-Weather Performers. See also "All-Weather Performers" on this website, as well as the Special Reports section.

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?
-Conviction Calls
-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).

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