The Zenith 2015 Australian Small Companies Sector Report found that excess returns in the sector, while strong, have reduced “significantly” from recent years.
Over 2014, the median small-cap manager produced absolute net returns of 1.6 per cent, compared to the -0.76 per cent return of the S&P/ASX Small Ordinaries Accumulation Index over the same period.
The sector has had an impressive recent history. In the three years to 31 December 2013, the small-cap sector outperformed the index by 18.5 per cent.
Over the past five years, excess returns of the small-cap managers in Zenith’s database have been “positive and of a relatively high magnitude”.
“As testament to the consistency in outperformance, even the bottom quartile of the sample set has outperformed the Index for the majority of the sample period,” the report said.
More recently, however, the bottom quartile has underperformed the index, “albeit marginally”, which Zenith put down to a “relatively more unfavourable environment for active management”.
Excess returns from small-cap managers peaked during 2013, noted Zenith – and a material proportion of the excess returns can be attributed to managers' underweighting the resources sector.
“Given the marked underperformance of the resources sector relative to the industrials in 2013, materially underweight positioning contributed strongly to overall performance and elevated the magnitude of excess returns to above-trend levels,” Zenith said.
“Excess returns in the Australian equities small capitalisation segment will be driven largely by superior bottom-up stock picking and return to more normalised levels,” the report said.
