In a paper titled The Evolving Small-Caps Landscape, Morningstar senior analyst Mark Laidlaw said resources-related companies represented half of the small-cap landscape at the peak of the resources bull-market in 2010.
“There has been a sharp sell-off in the sector in subsequent years, more than halving from peak levels,” Mr Laidlaw said.
Morningstar expects small-cap managers will find it more difficult to generate the level of excess returns investors have enjoyed in recent years, he said.
For one thing, the performance differential between resources and industrials is showing “clear signs of narrowing”, Mr Laidlaw said.
“Expectations are strengthening that the resources sector has bottomed and this is reflected by its index weighting stabilising in the past year,” he said.
“Anecdotally we are starting to hear that small-cap managers are dipping their toes back in the sector,” Mr Laidlaw said.
Reflecting on 2013 Morningstar forecasts, Mr Laidlaw said he still expects the future performance drivers for Australian small-caps will be different from those of the past.
“The resources sector has more than halved from peak levels towards the end of 2010 and its weighting within the index has fallen commensurately,” Mr Laidlaw said.
“Notwithstanding that the resources sector may be stabilising, it’s fair to expect that the relative performance kicker a fund manager can expect from just shunning mining and mining services stocks will be much less,” he said.
“We have already seen companies fold and some more may still go. This may provide the chance for others to profit from the collapse of competitors, creating opportunities for investors with the skills to successfully sort the winners from the losers,” Mr Laidlaw said.
