Top-rated exposures to small cap boom
The Australian Securities Exchange is seeing a boom in local listings of companies valued at less than $100 million, according to research compiled by HLB Mann Judd.
The Australian Securities Exchange is seeing a boom in local listings of companies valued at less than $100 million, according to research compiled by HLB Mann Judd.
The 88 small cap company listings in 2017 comprised 80 per cent of the total 110 initial public offerings (IPO) completed last year--up considerably on the growth in small cap listings between 2016 and 2017 (38 per cent).
"There has been a marked shift in the past two years towards an increasing proportion of the IPO market being made up of small cap companies," says Marcus Ohm, partner, HLB Mann Judd Perth, and author of the accounting and financial advice firm's IPO Watch report.
"New listings significantly outperformed the wider market in 2017 in terms of year-end share price gains, with an average increase in share price of 46 per cent across all new IPOs, and 56 per cent within the small cap sector specifically. This compares favourably against the ASX 200, which nonetheless recorded a solid increase of 7 per cent overall," Ohm says.
The higher proportion of small cap company listings is reflected in the lower total of funds raised during 2017 relative to previous years, down to $4.1 billion, from $7.5 billion in 2016.
"This was also well below the three-year average of $6.2 billion, reflecting the past contribution of large cap companies. Notably, there were no listings in 2017 with a market capitalisation in excess of $1 billion. In total, small cap companies raised $1.1 billion of the total raised for the year, or 28 per cent, compared to 11 per cent in 2016," Ohm says.
Sectors that led listings
The materials sector led small cap listings in 2017, accounting for 32 per cent of listings and 27 per cent of fundraising in the space.
The financial services sector was the largest contributor, generating 15 listings and raising a total of $1.9 billion.
Software and services saw 11 listings overall in 2017, down from 21 in 2016, but 10 of these were small caps. This contrasts with the experience of 2016, when five of the listings in this sector were large cap companies.
Pharmaceuticals, biotechnology and life sciences was the only sector among small caps that had more than five listings, recording a total of seven IPOs in 2017.
In terms of the scale of small cap listings, "the impact of materials listings was more pronounced, making up 32 per cent of small cap listings and 27 per cent of small cap fundraising".
Silver and bronze small cap funds
While owning direct shares in small- or micro-cap companies can be a riskier proposition than buying larger, more mature companies, investing via managed funds may provide a more secure method of exposure.
The following funds are three of Morningstar's preferred managed funds providing access to smaller companies. The first two hold silver medal ratings, while the third has a bronze medal.
"NovaPort Smaller Companies [9140] seeks companies whose potential the firm feels is not widely recognised or understood. This strategy's research effort is focused on the smaller- and micro-cap end, which the house believes offers more attractive opportunities over the long term," says Andrew Miles, manager research analyst, Morningstar.
Its sector exposure is heavy on healthcare (20 per cent), consumer cyclical (24 per cent), financial services (12.8 per cent) and materials (11.2 per cent).
Investors Mutual WS Aus Smaller Companies [5340] "stands out as an excellent option for investors wanting exposure to Australian companies outside the ASX top 100," says Morningstar manager research analyst, Sarah Fox.
Its top five sector weightings are consumer cyclical (25 per cent), industrials (18.7 per cent), financial services (14 per cent), healthcare (13 per cent) and real estate (7.8 per cent).
"The team implements a highly disciplined investment process which seeks to identify attractively valued investment opportunities based on a variety of financial criteria, overlayed with a strict quality filter to ensure the avoidance of 'value traps,'" Fox says.
Bronze medallist Spheria Australian Smaller Companies [15723], founded in April 2016, is a relatively new boutique, backed by Pinnacle Investment Management.
"This strategy adopts a sensible approach to small-cap investing in Australia, focussing on companies with strong cash flow generation and sound balance sheets," says Morningstar manager research analyst, Michael Malseed.