The Case for Specialist Active Management in

Transcription

1 The Case for Specialist Active Management in Smaller Capitalisation Australian Stocks Author: Bruce Robertson Business Development Manager, Celeste Funds Management. Phone: The Australian Stock Market is characterised by a narrow concentration on just a few sectors of the economy. In this paper I will present to you the case for investment with an active portfolio manager of smaller company stocks in the Australian Market. Smaller company investment in Australia gives portfolio diversification, exposure to generally more favourably priced stocks and companies that can offer growth rates that are often greater than their large capitalisation peers. The S&P/ASX 100 index is dominated by the largest stocks. Indeed the top dozen companies account for over 62% of the index. The narrow nature of the index is compounded by the fact that the big 4 banks comprise 32% of the index. The big resource companies account for a further 14% of the index. The Top Dozen Large and Smaller Capitalisation Stocks Large Capitalisation Stocks Smaller Capitalisation Stocks S&P/ASX 100 S&P/ASX Small Ordinaries Rank Company % of index Company % of index 1 Commonwealth Bank 10.2 Fairfax Media BHP Billiton 9.5 Australand Property Westpac Banking Corporation 8.6 CSR Limited ANZ Banking Group 7.1 Transpacific Industries National Australia Bank 6.4 TPG Telecom Telstra Corporation 5.1 Fletcher Building Wesfarmers 3.9 Magellan Financial Group Woolworths 3.7 Qube Holdings Limited CSL Limited 2.7 Platinum Asset Management Rio Tinto 2.1 Nine Entertainment Woodside Petroleum 2.0 Super Retail Group Westfield Group 1.7 Cromwell Property Source: Iress - Index weight from 9/5/2014 In summary some 46% of the ASX 100 index is made up of just 7 stocks from just 2 sectors, the very largest banks and the very largest resources companies.

2 Investing in the ASX 100 is really a large investment in just a portion of 2 sectors of the market. The dangers of such a concentrated portfolio should be patently obvious however index investment, or indeed active investment, in the large capitalisation sector is often perceived as risk averse. The trend, over the last 30 years, in active management of larger capitalisation stocks has increasingly become one of index enhanced investment. Portfolio managers over the long term have moved away from true active management towards a position of taking small tilts around the benchmark index. Conviction in active investment in this sector of the market has been consigned to history. A Smaller company portfolio manager in Australia plays on a totally different field to his larger company compatriots. Whilst the larger company fund managers are looking at just 100 stocks and concentrating their efforts on just 2 sectors of the market the smaller company manager has a much broader field to play on. The small ordinaries is not dominated by the largest companies in the index. Indeed the top 12 companies in the small ordinaries index only account for 18%. By its very nature this sector of the market is for active investors only. Stock selection is critical to the generation of superior returns in the small company sector A small company portfolio manager looks at the 90% of the listed companies that escape their larger capitalisation brethren. The smaller company market comprises just under 8% of the market however it gives the portfolio manager a far broader range of companies in a far broader range of sectors to evaluate. Small Companies can offer growth rates which are often greater than their large capitalisation peers and trade on more attractive fundamentals. Smaller Companies generally trade on lower PE s, Enterprise Value multiples and importantly for investors, higher dividend yields. Somewhat surprisingly, given the attractive dynamics in the sector, the small capitalisation stocks have underperformed their larger capitalisation brethren since the early 1990 s. As the graph below shows the same cannot be said for active smaller capitalisation equity managers who have on average handsomely outperformed their index, the larger companies index and active Australian large company equity managers. Smaller Company portfolio manager s stock picking skills have, on average, added significant value.

3 Source: Morningstar Direct The smaller companies sector has proven rich pickings for the average active Australian Smaller Companies portfolio manager. Investors in the average small companies manager have received above market returns but more importantly have received strong absolute returns. From 1 January 1991, according to Morningstar Direct, an initial investment of $10,000 in the median small companies manager, would have grown to over $300,000 by Whilst the smaller companies sector is just under 8% of the market it is not a sector that should be ignored by investors. An exposure to an active small companies fund provides portfolio diversification away from the narrow nature of the Australian market. More importantly it has provided handsome long term returns both relatively and in absolute terms. Investors are not investing for esoteric reasons they are investing for a solid return. An investment in an active portfolio of Australian smaller companies is something worthy of consideration.

4 DISCLAIMER: is the investment manager and Responsible Entity of the Celeste Australian Small Companies Fund. This information is not intended to provide advice to particular investors, or take into account an individual s investment objectives, circumstances and needs for investment. Investors should consult a financial adviser. This information was prepared by (). To the extent permitted by law, no liability is accepted for any loss or damage as a result of any reliance on this information. Celeste Funds Management does not guarantee the performance of any Fund or the return of an investor s capital. A Product Disclosure Statement (PDS) for the Celeste Australian Small Companies Fund under which offers to invest are made, can be downloaded from. Anyone wishing to invest in the Fund will need to complete the application form in the current disclosure document. Total returns have been calculated using gross returns unless otherwise indicated. Past performance is not indicative of future performance.

5 The Case for Specialist Active Management in Smaller Capitalisation Australian Stocks Author: Bruce Robertson Business Development Manager, Celeste Funds Management. Phone: The Australian Stock Market is characterised by a narrow concentration on just a few sectors of the economy. In this paper I will present to you the case for investment with an active portfolio manager of smaller company stocks in the Australian Market. Smaller company investment in Australia gives portfolio diversification, exposure to generally more favourably priced stocks and companies that can offer growth rates that are often greater than their large capitalisation peers. The S&P/ASX 100 index is dominated by the largest stocks. Indeed the top dozen companies account for over 62% of the index. The narrow nature of the index is compounded by the fact that the big 4 banks comprise 32% of the index. The big resource companies account for a further 14% of the index. The Top Dozen Large and Smaller Capitalisation Stocks Large Capitalisation Stocks Smaller Capitalisation Stocks S&P/ASX 100 S&P/ASX Small Ordinaries Rank Company % of index Company % of index 1 Commonwealth Bank 10.2 Fairfax Media BHP Billiton 9.5 Australand Property Westpac Banking Corporation 8.6 CSR Limited ANZ Banking Group 7.1 Transpacific Industries National Australia Bank 6.4 TPG Telecom Telstra Corporation 5.1 Fletcher Building Wesfarmers 3.9 Magellan Financial Group Woolworths 3.7 Qube Holdings Limited CSL Limited 2.7 Platinum Asset Management Rio Tinto 2.1 Nine Entertainment Woodside Petroleum 2.0 Super Retail Group Westfield Group 1.7 Cromwell Property Source: Iress - Index weight from 9/5/2014 In summary some 46% of the ASX 100 index is made up of just 7 stocks from just 2 sectors, the very largest banks and the very largest resources companies.

6 Investing in the ASX 100 is really a large investment in just a portion of 2 sectors of the market. The dangers of such a concentrated portfolio should be patently obvious however index investment, or indeed active investment, in the large capitalisation sector is often perceived as risk averse. The trend, over the last 30 years, in active management of larger capitalisation stocks has increasingly become one of index enhanced investment. Portfolio managers over the long term have moved away from true active management towards a position of taking small tilts around the benchmark index. Conviction in active investment in this sector of the market has been consigned to history. A Smaller company portfolio manager in Australia plays on a totally different field to his larger company compatriots. Whilst the larger company fund managers are looking at just 100 stocks and concentrating their efforts on just 2 sectors of the market the smaller company manager has a much broader field to play on. The small ordinaries is not dominated by the largest companies in the index. Indeed the top 12 companies in the small ordinaries index only account for 18%. By its very nature this sector of the market is for active investors only. Stock selection is critical to the generation of superior returns in the small company sector A small company portfolio manager looks at the 90% of the listed companies that escape their larger capitalisation brethren. The smaller company market comprises just under 8% of the market however it gives the portfolio manager a far broader range of companies in a far broader range of sectors to evaluate. Small Companies can offer growth rates which are often greater than their large capitalisation peers and trade on more attractive fundamentals. Smaller Companies generally trade on lower PE s, Enterprise Value multiples and importantly for investors, higher dividend yields. Somewhat surprisingly, given the attractive dynamics in the sector, the small capitalisation stocks have underperformed their larger capitalisation brethren since the early 1990 s. As the graph below shows the same cannot be said for active smaller capitalisation equity managers who have on average handsomely outperformed their index, the larger companies index and active Australian large company equity managers. Smaller Company portfolio manager s stock picking skills have, on average, added significant value.

7 Source: Morningstar Direct The smaller companies sector has proven rich pickings for the average active Australian Smaller Companies portfolio manager. Investors in the average small companies manager have received above market returns but more importantly have received strong absolute returns. From 1 January 1991, according to Morningstar Direct, an initial investment of $10,000 in the median small companies manager, would have grown to over $300,000 by Whilst the smaller companies sector is just under 8% of the market it is not a sector that should be ignored by investors. An exposure to an active small companies fund provides portfolio diversification away from the narrow nature of the Australian market. More importantly it has provided handsome long term returns both relatively and in absolute terms. Investors are not investing for esoteric reasons they are investing for a solid return. An investment in an active portfolio of Australian smaller companies is something worthy of consideration.

8 DISCLAIMER: is the investment manager and Responsible Entity of the Celeste Australian Small Companies Fund. This information is not intended to provide advice to particular investors, or take into account an individual s investment objectives, circumstances and needs for investment. Investors should consult a financial adviser. This information was prepared by (). To the extent permitted by law, no liability is accepted for any loss or damage as a result of any reliance on this information. Celeste Funds Management does not guarantee the performance of any Fund or the return of an investor s capital. A Product Disclosure Statement (PDS) for the Celeste Australian Small Companies Fund under which offers to invest are made, can be downloaded from. Anyone wishing to invest in the Fund will need to complete the application form in the current disclosure document. Total returns have been calculated using gross returns unless otherwise indicated. Past performance is not indicative of future performance.