State Street Global Advisors head of active quantitative equities Toby Warburton noted one advantage of Australian small-cap names is there can be a significant divergence in the performance of stocks within this segment – as well as the possibility of outsized returns.
He said this creates opportunities for an active manager to find stocks that can deliver meaningful outperformance relative to a heavily large-cap skewed benchmark.
“We should not look at the cap-weighted index returns, but rather the returns of the best-performing stocks within each segment of the market,” Mr Warburton said.
“The returns of the top third of stocks, for example, within the smallest third of the market tend to be greater than the best mid-caps, which in turn beat the top large-cap names.”
Mr Warburton noted that smaller-cap names do come with the possibility of greater risk.
However, he said it is possible to take advantage of some of the opportunities in the smaller end of the market without taking on too much risk for clients.
“We find that a balanced approach, weighing up the return opportunities alongside risk, does generally result in a higher allocation to the mid- and small-cap names than the benchmark index,” Mr Warburton said.
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