The Strategy returned 16 per cent in the September quarter, beating its benchmark by 0.7 per cent.
"This exceptional performance was achieved despite not holding gold miners (given the fund's ex-resource focus), which actually detracted over 400 basis points over the year," Ellerston CIO and portfolio manager David Keelan said.
The Ellerston Australian Emerging Leaders fund targets Australian small-cap companies with market capitalisations between approximately $500 million and $2 billion, alongside a selective allocation to micro caps.
Its portfolio managers focus on identifying businesses that demonstrate growth at a reasonable price (GARP) and possess strong quality characteristics. The fund maintains a clear emphasis on industrials – that is, non-resource sectors.
During the September quarter, the fund trimmed technology holdings that had reached price targets or no longer offered an attractive risk/reward balance, redeploying capital into domestically oriented cyclicals, particularly within mining services.
As part of this repositioning, new investments were made in mining technology firm Imdex (IMG) and metal detection manufacturer Codan (CDA).
"The companies added are the sector’s “picks and shovels”. They are the providers of equipment, technology and services rather than direct commodity production. This offers steadier, cash-flow-driven participation and also moderates risk through a broader set of revenue drivers," Keelan said.
Ellerston believes sentiment in the small-cap sector has improved – and risk aversion has abated.
Improving outlooks and stronger-than-expected earnings have also provided support, with many small-cap stocks now gaining momentum on the back of credible guidance.
According to the fund’s co-portfolio manager, Alexandra Clarke, small cap names that were viewed sceptically a year ago are now receiving fairer consideration.
“At the same time, large-cap underperformance following the August reporting season has driven capital further down the market cap spectrum, improving liquidity and breadth across small caps," Clarke said.
"Importantly, this trend is expected to continue through the next quarter and into 2026, with small caps offering stronger earnings growth and more attractive valuations than large caps, which face a third consecutive year of weak earnings and structural challenges," Keelan added.
A standout example of this trend, according to Ellerston, is child online safety monitoring firm Qoria, which is approaching free cash flow generation and saw its share price surge 50 per cent over the September quarter.
"This theme of re-rating by companies moving to cash flow breakeven has been a significant contributor to returns for the fund," Clarke said.
The Ellerston Australian Emerging Leaders Strategy recently had its “Recommended” rating reaffirmed by independent research firm Lonsec.
