The underperformance of energy and resources small-cap stocks in recent years has created a much more diverse index, says a new Lonsec report.
According to Lonsec's Australian Equities Smaller Companies Fund Sector Review, as the value of resources stocks fall, so too does their weighting within the index.
Lonsec analyst and author of the report Nick Thomas said: “This is leading to a healthier balance of companies and industries within the popular sector.”
“The obvious impact from the disparity between resources and industrials is that the materials and energy sectors now make up a far smaller proportion of the benchmark index.
“They have been replaced by increases in consumer discretionary stocks, financials and, to some extent, healthcare and telecommunications.
“Overall the balance and diversity within the index now looks far healthier,” Mr Thomas said.
According to Lonsec, there is still a case for investing in small-caps despite the ASX S&P Small Ordinaries Index falling 3.8 per cent in 2014.
“Fund managers who have shown strong industrial selection, as well as avoiding the blow-ups in mining and mining services, have produced solid returns during the past three years,” he said.
Lonsec noted strong returns were found in various sectors over 2014 – REITS (26 per cent), telecommunications (26 per cent), diversified financials (12.5 per cent), and consumer services (23 per cent).
When investing in the sector, Lonsec recommends that investors “allocate appropriately”.
“Small-cap investment can be rewarding but volatile so match investment to risk,” the report said.
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