Best Small Companies Funds
The focus is on companies that can generate plenty of cash and have growth potential
Smaller companies funds bounced back in the past 12-months, providing investors with strong returns.
The Spheria Australian Smaller Companies fund was outright winner of this category, after being in joint second place last year. Its portfolio consists of 25 to 45 stocks with an expected turnover of 30%-40% a year, says Morningstar analyst Michael Malseed.
“Spheria Australian Smaller Companies continues to be an appealing option in the small-cap space as it remains nimbler than many peers,” says Malseed in an October 2018 report. Established in April 2016, the fund is still a relatively new boutique, backed by Pinnacle Investment Management.
“Marcus Burns and Matthew Booker, the founders and portfolio managers, have extensive financial markets experience,” says Malseed.
The fund employs a relatively straightforward investment process, focusing on companies with strong free cash flow generation, sound balance sheets and attractive valuations based on mid-cycle earnings estimates. “A willingness to invest a portion of the portfolio in unloved, turnaround opportunities results in value tilt but the duo often finds merit in a number of high-quality growth names whose near-term multiples trade at a premium. Overall, its structure and experience make the fund an attractive proposition.”
Malseed does point out that with a base fee of 1.10% and a performance fee of 20% on benchmark-beating returns, the fund is not the cheapest offering.
Seven funds took equal second place, including last year’s joint winner, Bennelong ex-20 Australian Equities, which typically holds 20 to 50 stocks. “Investors looking for a high-conviction growth manager have a lot to like in Bennelong ex-20 Australian Equities despite the presence of some underlying issues,” says Morningstar analyst Matthew Wilkinson.
A big issue is high key-man risk as a lot rests on the shoulders of Mark East, says Wilkinson, who describes East as “one of the best portfolio managers in the market.”
Other equal-second funds are:
Fidelity Future Leaders typically holds 40 to 70 stocks. The fund’s strengths include a thoughtful portfolio manager, a well-considered investment process and a structured portfolio methodology, which should reward investors through the cycle, says Morningstar analyst Ross MacMillan.
NovaPort Microcap invests in a diversified portfolio of between 25 and 65 stocks mainly in listed Australian companies with a market capitalisation of less than $250 million at the time they are first acquired.
Its investment approach is underpinned by the belief that there are significant investment opportunities in micro-cap companies due to inefficiencies in the market.
OC Micro-Cap has a portfolio of 25 to 60 stocks designed for investors who want diversification and strong capital growth over the long term. To achieve this, the team invests in microcap Australian companies with sustainable business models and attractive investment qualities.
OC Premium Small Companies invests in about 40 companies. “Overall this is a quality offering with many desirable characteristics, including a skilful portfolio manager and a solid investment process,” says Morningstar analyst Ross MacMillan.
Pendal MidCap is an actively managed portfolio of 40 to 60 stocks selected by the investment team employing a bottom-up valuation process. It’s designed to complement a conventional, core share portfolio by providing satellite exposure to select Australian mid-cap equities with the potential for performance enhancement.
SGH ICE holds a diversified portfolio of 30 to 50 Australian stocks. “The fund’s strategy seeks to invest in stocks that have a sustainable competitive advantage and are likely to have high future returns,” says Morningstar analyst Sarah Fox. “A disciplined approach and an edge in company analysis make SGH ICE one of our top picks in this space.”