Home' Forge : Vol 2 No 4 Contents Meanwhile, the ASX 100
Index benefited from its heavy
weighting in financial services
companies (mostly banks),
utilities and Australian real estate
investment trusts (A-REITs). The
market could not get enough of
high-yielding stocks as interest
rates worldwide fell.
Those dynamics started to reverse
in 2016. Resource stocks rallied,
boosting the Small Ordinaries, while
bank stocks, utilities and A-REITs
eased, as investors fretted over the
prospect of rising US interest rates,
which, in turn, weighed on the ASX
The market’s largest companies
delivered flat earnings growth
against consensus analyst
forecasts, weighed down by
a sluggish economy and less-
Small companies collectively
are producing faster earnings
growth. Many are exposed to
higher-growth sectors, such as
information technology and
telecommunications, and their
greater agility helps them to adapt
to volatile market conditions. ASX
100 companies, in contrast, are
clustered in the slowing financial
services and industrial sectors.
Fund managers were prepared to
pay higher valuations for mid- and
small-cap companies with strong
growth prospects. Depending on
the broker forecasts that are used,
the Small Ordinaries Index traded
at a slight premium to the ASX 100
Index (comparing the aggregate
forward price earnings multiple of
each index). Small caps historically
trade at a discount.
Stocks such as vitamins producer
Blackmores, Domino’s Pizza
Enterprises, electronics retailer
JB Hi-Fi, travel group Webjet, and
furniture retailer Nick Scali rallied.
Small-cap outperformance forced
fund managers who normally stick
to the market’s largest companies to
look outside the ASX 100 for ‘alpha’
– a return greater than the market
return. Simply put, more money
flowed in mid- and small-cap
stocks, driving prices higher.
funds (SMSFs) also showed greater
appetite for small-cap stocks.
SelfWealth, a leading social network
site that has thousands of trustees
as members, has identified a
significant trend in SMSF portfolios
to stocks outside the top 100.
Almost one in five stocks in
SMSF portfolios are now from
outside the ASX 300 Index – the
so-called ‘micro caps’, SelfWealth
data shows. That compares to
almost one in 10 stocks in 2015.
SMSF trustees, faced with stagnant
returns from the market’s largest
companies, are looking further
down the market for higher returns,
much like institutional investors.
The Investment Trends 2016 SMSF
Investor Survey also identified
a slight move away from blue-
chip and high-yielding shares in
portfolios, and steady interest in
This is an unusual trend in an
unusual market. Small caps
typically outperform when
the economy is buoyant and
investors have greater risk
appetite. In volatile markets,
larger blue-chip stocks are often
favoured for their defensive
qualities and higher yield.
But as global economic uncertainty
grows, the $621 billion SMSF sector
appears to be increasing its holding
of riskier small-cap stocks relative
to blue-chip companies.
The survey also identified a gradual
shift in SMSF portfolios away from
direct ownership of equities to
investing in managed funds. About
38 per cent of SMSF portfolios own
shares directly, up from 45 per cent
in 2013 – a change worth tens of
billions of dollars.
Rather than being parked in cash,
money flowing out of direct equities
in SMSFs is going to managed
funds, such as unit trusts, listed
investment companies (LICs) or
exchange-traded products (ETPs).
Intuitively, that makes sense.
Investment Trends’ survey showed
that SMSF trustees have become
more bearish on shares for the
next 12 months. More trustees
are turning to professional
managers, and using managed
funds to improve portfolio
diversification, rather than
doing it themselves by choosing
and holding shares directly.
This trend has implications for
small-cap investing. It’s likely that
more SMSF trustees will look to
small-cap stocks to boost portfolio
returns, but will gain exposure to
them through unlisted or listed
funds, rather than trying to wade
through 1900 or so small-cap stocks
on the ASX, and pick and monitor
the best ones.
One strategy is using ETPs in the
portfolio ‘core’ to provide market-
like returns in blue-chip stocks,
for low fees; then using small-cap
unit trusts or LICs as portfolio
‘satellites’ to deliver higher returns,
for higher fees.
Rather than attempt to pick
hot small stocks, SMSF trustees
might increasingly spend their
wealth creator // 113
continued on page 116
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