If I had to list the top two questions right now, number one would be “what are my best mid-cap / small-cap funds to invest in?”, followed closely by “how do I invest in the Midcap 50?” It seems that everyone is talking about the top 20 stocks being growth challenged, and the opportunities in the smaller (non-resources) parts of the market.
It hasn’t always been this way. In fact, the performance of the Small Ordinaries, which is an index that tracks the 200 companies ranked 101st to 300th by market capitalization, was terrible until quite recently. As the following graph shows, since the start of 2012 until last Friday (almost five years), the Small Ordinaries (green) is up by 32.7% (including dividends). The S&P/ASX 200 (blue) has returned 67.8%.
[1]Data: S&P Dow Jones, Chart: Switzer Super Report
It is a different story in more recent times. This calendar year, the Small Ordinaries is up by 18.40%, compared to the broader market’s 7.19%.
The Midcap 50 (red), which represents stocks ranked 51st to 100th by market capitalization, has outperformed the S&P/ASX 200 over this period. It has also performed well this calendar year, up by 19.46%.
Before moving on, I am not aware of any fund that specifically tracks or aims to outperform the Midcap 50. It is really a statistical index that addresses the gap between the S&P/ASX 50 (the top 50) and the S&P/ASX 100 (the top 100).
Is the recent outperformance of mid and small cap stocks going to continue? The momentum buyers certainly think so, and there is a case that the top 20, dominated by the banks, Telstra and the major retailers, are really struggling to grow. For investors, I don’t think you can ignore this part of the market because theoretically, this is where the growth should come from.
Investing in individual stocks is one way to gain exposure, but with smaller stocks, this obviously carries more risk (and potentially reward). Alternatively, you can look to professionals to give you this exposure.
Here is my take on some of the better funds to choose from. I would like to call them the “best”, but I don’t think this is a claim that is easy to make, or necessarily easy to prove. Take out some manager insurance and consider two or three funds.
1. WAM Capital Limited
Geoff Wilson’s WAM Capital Limited (WAM) has a fantastic track record. One of the largest listed investment companies at circa $950m, it trades at a premium to net tangible asset backing (NTA), so investors pay to access this performance. On 31 July, this premium was 13.2%.
The company runs an actively managed portfolio of undervalued growth companies, which are generally found in the small to medium industrial sector. WAM also provides exposure to relative value arbitrage and market mispricing opportunities. Among its top 10 holdings as at 31 July were exposures to another listed investment company (Hunter Hall Global Value), Ardent Leisure, Nick Scali, Aristocrat Leisure and Reliance Worldwide.
[2]Performance has been very strong, as shown in the table below. It does, however, benchmark against the broader All Ordinaries Accumulation Index. If, for example, the 1 year performance had been compared to the midcap 50, the outperformance would only be 1.5%.
2. Mirrabooka Investments Limited
Another LIC, Mirrabooka (ASX: MIR) specialises in investing in small and medium sized companies located within Australia and New Zealand. It defines these as companies that fall outside the top 50 listed companies by market capitalization. On 31 July, Mirrabooka was trading at a premium to NTA of 20.5%!
Among its top 10 holdings as at 31 July were exposures to Treasury Wines Estates, Qube, Lifestyle Communities, Healthscope and IRESS. Typically, it owns 50 to 80 stocks.
It benchmarks against an average of the Midcap 50 and Small Ordinaries Index. Performance has not been as strong recently on a relative basis, although 5- and 10-year performance to 30 June are well above benchmark.
[3]3. Investors Mutual Australian Smaller Companies Fund
This unlisted $160m fund has been around since 1998, with Simon Conn leading the portfolio investment team since 2002. It invests in a diversified portfolio of quality ASX listed Australian and New Zealand shares outside the top 100.
The fund aims to provide a rate of return (after fees and expenses and before taxes), which exceeds the return of the S&P/ASX Small Ordinaries Index (excluding listed property trusts) on a rolling four year basis. The management fee is 0.993% pa. It is available on most investment platforms, or you can invest directly through the Manager.
Performance over most periods has been very strong, with outperformance since inception of almost 10% pa.
The Fund will invest in a diversified portfolio of quality ASX listed Australian and New Zealand shares outside the Top 100 shares listed on the ASX, where these shares are identified by our investment team as being undervalued.
[4]4. UBS Australian Small Companies Fund
The UBS Australian Small Companies Fund, which was established in 2004, has performed strongly during the last 12 months. It invests in a portfolio of 30 to 60 small company shares, and aims to outperform (after management costs) the S&P/ASX Small Ordinaries Accumulation Index when measured over rolling five-year periods.
The management fee is 0.85% pa, plus a performance fee of 20% of any outperformance above its benchmark.
[5]5. Macquarie Australian Small Companies Fund
Established in 2006, this $56m unlisted fund has had an exceptional last 12 months. It aims to outperform the S&P/ASX Small Ordinaries Accumulation Index (Benchmark) over the medium to long term (before fees). It aims to provide capital growth and some income.
The management fee is 0.923% pa.
[6]6. Contango Microcap Limited (CTN)
Contango MicroCap Limited (CTN) is Australia’s longest running micro- cap LIC. The company was founded in 2004, and aims to achieve a long-term return over and above the benchmark ASX All Ordinaries Accumulation Index and to also pay regular and franked dividends. To achieve its objective, the fund invests in a diversified portfolio of ASX listed micro-cap stocks with a market cap of between $30 million and $350 million.
Performance has been robust in both an absolute and relative sense. In the 12 months to June, it returned 19.44%, and since inception, has returned 15.8% pa. Over most time periods, it has outperformed its benchmark (All Ordinaries Accumulation index).
On 31 July, CTN closed at a price of $1.08 compared to a pre-tax NTA of $1.30, a discount of 16.9%.
[7]Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regards to your circumstances.