Small investments offering big gains

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October 10 2019
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Investors looking beyond the ASX 200 are able to significantly grow their portfolio with marginal additional risk, an asset management firm has identified.

In Clime’s media briefing, the industry experts compare large and small caps and the benefits investors can gain by allocating part of their portfolio to small caps.

Why you shouldn’t rely on large caps

For many passive investors, buying the ASX 200 allows for theoretical strong returns.

However, Clime has argued that the ASX 200 is too dominated by banks and miners, providing little diversity for clients invested in the assets.

According to Adrian Ezquerro, Clime’s head of investment, a lack of diversity will hurt investors with forecasts for large caps continuing to fall.

“At the start of the financial year the ASX 100 were forecasted to grow by 8.8 per cent, which has been dialled back to about 6.5 per cent within two months. Today, it is looking at five per cent growth, which is still a little optimistic,” Mr Ezquerro said.

The fund manager also highlight the overweighting that’s occurred in ASX 20 stocks through passively buying the market.

“If you look at the composition of the market (of the ASX 20), you circuit 55 per cent of the market. If you are buying an index fund or taking a passive approach, 55 cent of every dollar is going into the ASX 20 and you’re getting banks, miners and a few large retailers,” he explained.

According to Mr Ezquerro this is a concern at present, with banks suffering large remediation costs while the miners are coming back from a “rocketing iron ore price”.

Benefits of small caps

While ASX 200 companies are displaying downgraded forecasts, Mr Ezquerro said small caps are predicted to grow by 20 per cent for the year ahead and 8.7 per cent for FY21.

“If you were to look at that in insolation you would say that stands out because there is a significant difference in the growth profile you’re seeing when comparing large and small caps,” he said.

Despite having significantly larger growth, potential investors are only paying marginally more to invest in small and mid caps.

“Interestingly, the forward P/E (price to earnings) for the ASX 100 is about 17 and [for] small caps outside the 100, it’s 17.4.”

“You’re paying a very small premium, for a far superior growth profile for mid and small caps,” Mr Ezquerro stated.

The fund manager credits a lack of coverage on small cap success, as well as the lack of the managers looking into the stocks as giving investors an opportunity to gain larger returns for less.

About the author

Cameron is a journalist for Momentum Media's nestegg and Smart Property Investment. He enjoys giving Aussies practical financial tips and tricks to help grow their wealth and achieve financial independence. As a self-confessed finance nerd, Cameron enjoys chatting with industry experts and commentators to leverage their insights to grow your portfolio.

About the author

Cameron is a journalist for Momentum Media's nestegg and Smart Property Investment. He enjoys giving Aussies practical financial tips and tricks to help grow their wealth and achieve financial independence. As a self-confessed finance nerd, Cameron enjoys chatting with industry experts and commentators to leverage their insights to grow your portfolio.

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