Economic transition boosting small-caps

Economic transition boosting small-caps

Many small-cap managers have outperformed the market as a result of the economy’s transition away from mining and energy sectors, says Morningstar.


In an update, Morningstar said the Australian economy’s transition away from resources enabled active small-cap managers to outperform the market in 2015.

“Most managers correctly assessed the impact of the slowing Chinese economy on commodity prices, and have steadfastly refused to fall into the value trap of underestimating the mining downturn,” the update said.

According to Morningstar, the small-cap market’s performance over the next three years will likely be driven by companies in fields such as financial services, consumer services and technology.

In addition, Morningstar noted that the initial public offering pipeline (IPO) surged in 2015, which was and continues to be positive for small-cap managers.

“An IPO-rich market environment is, however, positive for small-cap fund managers and investors in their funds, adding diversity and liquidity.

“The key issue for fund managers is to avoid exuberance, particularly when pressure is being applied by stockbrokers for rapid decisions,” the update said.

Morningstar said it favours small-cap managers that retain a “healthy scepticism” when evaluating new stock, particularly when the sellers are private equity or investment banks.

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Economic transition boosting small-caps
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