Fund flows in the small-cap sector continue to be flat, Lonsec's latest small-cap Australian equity sector review has found.
"While funds under management continued to grow, this was largely due to market movement - actual inflows were relatively flat," Lonsec senior investment analyst Lin Ngin said.
"This is consistent with the findings of Lonsec's recent large-cap review. Unlike the large-cap sector, the small-cap universe has not been subject to competition from low-cost ETFs (exchange-traded funds) and index-style products.
"These products are much less likely to impact the small-cap universe as the argument for passive index-style products is substantially weaker in this sector."
The Lonsec review found the average small-cap manager in its universe was underweight the resources sector, which Ngin said was largely due to a quality bias in their investment process.
"This can be incompatible with small-cap resources stocks where the company may not be generating cash flow or earnings, or may be a higher-risk, single-mine business," he said.
There was also limited initial public offering (IPO) activity in the small-cap sector, the review found.
"Historically, IPOs have been a major source of investment ideas for small-cap managers, however, 2009 was a relatively quiet year with just $7.5 billion in IPOs across large and small caps," Ngin said.
While 2010 saw $25 billion in IPOs, he said most of that was in large caps or small resources.
"The lack of new industrial stocks is of some concern," he said.
"This is compounded by the departure of some industrials, such as JB Hi-Fi, which became a mid-cap stock and therefore out of the investment universe for most small-cap managers.
"Other IPOs, such as Rebel Sport, have been put on the backburner after the lacklustre performance of high-profile industrial IPOs, such as Myer, Kathmandu and QR National."
