An actively managed small cap portfolio can provide investors with significant opportunities, according to investment manager NovaPort.
A research paper titled Concentrating on small companies constructed by NovaPort co-portfolio managers Sinclair Currie and Alex Milton, indicated 62 per cent of stocks in the small ordinaries index generated positive returns in the past 10 years.
Ten per cent of those stocks performing positively produced a 10-fold increase in share prices over the 10-year period.
Mr Milton said small companies are often pioneering new markets and have very low market share, and therefore have opportunities to grow even if the market is contracting.
According to both portfolio managers, NovaPort has adopted a “benchmark unaware, active stock selection approach to investing in small companies”, enabling NovaPort to better target companies that will generate a 50 per cent return over a three-year period, in line with its objectives.
Mr Milton said his job was to find agents of change, innovators and those businesses offering a better service and better overall outcome for customers.
“In a way, we see ourselves as company investors, and these companies happen to be listed on the stock market, rather than saying we see ourselves as stock market investors per se,” said Mr Milton.
Mr Currie said investors need to focus on a few ideas rather than hug the index to realise the real potential for returns in the sector.
“Small cap investing is very different to large cap investing. It covers a broad classification of businesses linked by only one common factor - size - making active management even more important,” he said.
“We invest in small caps to find ‘shooting stars’, companies that will grow to become the next big thing, not stay in the index for years,” said Mr Milton.
NovaPort expects the market’s focus to shift towards growth in 2014 and for funds under management to increase in the small cap sector.