Small-cap potential

Peter Freeman reports on the ones to watch among small-companies funds

Peter Freeman

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INVESTORS WHO WANT TO MAXIMISE their potential sharemarket returns need to move well beyond buying shares in Australia’s major companies. As argued in a report in last November’s edition of Money, one of the best ways to do this is to take an exposure to good-quality, unlisted smaller-companies funds.

Since that report, which focused mainly on the observations and recommendations of research groups Morningstar and Zenith, another assessment of smaller companies funds has been released, this time by van Eyk research.

While van Eyk tends to be fairly coy about publicly releasing its ratings, it was prepared to identify two funds it rates very highly – Ironbark Karara Small Companies Fund (APIR code PAT0002AU) and Ausbil MicroCap Fund (AAP0007AU).

Significantly, the Ironbark Karara fund is rated highly recommended by Zenith and has a silver rating from Morningstar, which currently gives only one smaller-companies fund – the closed Kinetic Wholesale Smaller Companies Fund – a gold rating.

As for the Ausbil MicroCap fund, this is rated recommended by Zenith, the research firm’s second-highest rating. It has also been rated recommended by another research group, Lonsec.

Based on these assessments, investors who want an exposure to smaller companies would be wise to take a close look at both Ironbark Karara Small Companies Fund and Ausbil MicroCap Fund.

According to Varun Venkatraman, the lead analyst of the van Eyk review team, the 29 small-companies funds examined were all of high quality, with every one of them outperforming the S&P/ASX Small Ordinaries Index over a one- to five-year time frame.

“It’s a highly competitive peer group, much more so than the large-cap sector,” he says. “It reinforces our belief that over the long term there is good potential for these managers to generate excess returns for investors.”

The critical issues considered by van Eyk when assessing smaller-companies funds were the managers’ ability to identify quality companies, the existence of a rigorous approach to valuing stocks, and a thorough knowledge of potential triggers that might result in a company’s stock being rerated by the market.

“Finding companies that are undervalued and knowing what changes will likely lead to a price correction is an important skill in a successful small-cap manager,” Venkatraman argues.

In the case of the highly rated Ironbark fund, its reputation was first established when it was the Patriot Small Companies Fund. Launched in June 2005, it quickly established an impressive performance track record.

It has maintained this since its relaunch as the Ironbark Karara Small Companies Fund after its acquisition by Ironbark Asset Management in April 2010.

Significantly, Nick Greenway, co-founder of Patriot and its highly successful small-companies portfolio manager, continues to manage the fund as a member of the investment team at Karara Capital. This is the specialist investment management group that has direct responsibility for the investments of Ironbark Karara Small Companies Fund.

The fund returned 9.89% in the 12 months to the start of November, a compound 11.06% over three years, 3.79% over five years and a very impressive 14.5% a year over seven years.

Its main drawback for some investors will be that it requires a minimum initial investment of $20,000, although it can be accessed via a range of wrap services, such as those run by Asgard, BT and Macquarie.

Ausbil Microcap Fund has an even higher minimum of $50,000. Again, it can be accessed through these three wrap services. The fund is managed by Ausbil Dexia, a local investment management group part-owned by the European-based Dexia Group. It offers investors a way to take an exposure to very small companies, including some just beyond start-up stage, that offer plenty of potential upside but also carry a bit more risk.

The fund was launched in February 2010 and returned an impressive 18.61% in the year to the start of November.

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