The 2013 Zenith Small Companies Sector Review found that in the 12 months to 31 December 2013 the median Zenith-rated manager returned 17.06 per cent, compared to -0.76 per cent for the S&P/ASX Small Ordinaries Index (outperformance of 17.82 per cent).
Zenith acknowledged the change to the structure of the S&P/ASX Small Ordinaries Index between 31 December 2010 and 31 December 2013 which has been driven by the outperformance of the industrials sector (ie, financial services and consumer staples) versus the resources sector.
The composition of the index has changed accordingly, with resources falling from 40 per cent of the index as at 31 December 2010 to 12 per cent as at 31 December 2013.
"As a result, any small capitalisation managers that held underweight positions to the resources sector had a ‘tailwind’ in terms of the potential to outperform the broader market by a significant margin," said the Zenith report.
"Whilst it may not necessarily be intuitive given the current breakdown of the Index, Zenith believes there continues to be merit in the use of the S&P/ ASX Small Ordinaries Index as the industry standard benchmark," it said.
With the current weightings of industrial at all time as a proportion of the index at all-time highs, Zenith said that continued outperfomance driven by managers overweighting industrials relative to resources will be "limited".
However, outperformance could nonetheless be buoyed by the continuing influx of initial public offerings in the market, said Zenith.
Total fees charged have also hit the spotlight in recent years, have increased significantly driven by outperformance.
"While performance fees have been high, on average, Zenith notes that they are only paid when funds outperform, thus investors would have also benefited from higher returns," said the report.
From an initial universe of 57 products, Zenith rated three 'highly recommended, 21 'recommended', and 10 'approved'. Of the 23 funds that were not rated, 23 were screened out and five declined to be rated.
The highly rated funds were the Fairview Equity Partners Emerging Companies Fund, the Ironbark Karara Australian Small Companies Fund and the Celeste Australian Small Companies Fund.
