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Specialist in Asia Pacific, Japan, China, India and South East Asia and Global Emerging Market equities.

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Stewart Investors manage investment portfolios on behalf of our clients over the long term and have held shares in some companies for over 20 years. They launched their first investment strategy in 1988.

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Leader in systematic equities across market cap weighted indices, smart beta and active quantitative strategies

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Australian Small and Mid Cap Companies

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Strategy Overview

Key Facts

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An experienced manager in an under-researched market segment

Outside of the heavily researched S&P/ASX 50 Index lies the fast-paced world of Australian small and medium sized companies.

Our portfolio managers have worked together for more than a decade and have delivered consistent absolute returns with above market performance over the medium and long term.

A skilled eye for value and growth on Australia’s up-and-coming companies

12

years together

Dawn Kanelleas, Michael Joukhador and Pavlos Totsis have worked together for more than 12 years. The Australian Small and Mid Cap Companies team expanded with the addition of Tahlia Gugusheff as an Investment Analyst in 2019. 

250

companies engaged

The team engages with over 250 CEOs, chairpersons, directors, suppliers and unlisted companies. The team conducts more than 1000 company engagements annually.

12

years of outperformance

The team’s flagship fund* has consistently outperformed its benchmark over the medium and long term.

*The flagship fund refers to the CFS Wholesale Australian Small Companies Fund. It is expected that the fund name will be changed to reflect the new brand name in late-2020.

Why invest in Small and Mid Cap Companies?

  • By favouring companies with sustainable competitive advantages, strong financials and predictable earnings we seek to deliver superior returns and protect from downside risks. 

  • Value is discovered through a bottom-up investment approach with an emphasis on industry, financials and management. 

  • We have delivered consistent absolute returns through all investment cycles over the medium and long term. 

  • The Australian mid caps space is characterised by successful companies with strong management teams, a successful business strategy, strong cash flow, a competitive advantage, access to debt markets and, perhaps most importantly, the hunger and capacity to grow. 

We look beyond Australia’s largest names

                                                       Performance of a $10,000 investment in the index versus our strategies

Successful managers not only have to identify stocks with the potential for strong capital growth, but avoid the stocks likely to suffer sharp falls.

There is typically greater risk and reward outside the Top 100 stocks.

How we invest in Australian equities

Adviser resources

How to find up and coming companies on the ASX

There are many high-quality small companies operating across all areas of the Australian economy. Some of these companies will one day grow into large, mature businesses. Identifying these stocks at the beginning of their journey provides investors with the potential for significant capital growth along the way. As small companies flourish, revenue and earnings growth are typically expanding at their fastest point in the company’s lifecycle – growth that larger, more mature companies would find difficult to replicate.

The advantages of mid caps

The mid caps space is characterised by successful companies with strong growth profiles, which can offer attractive diversification benefits to Australian equity portfolios. Yet they comprise only a small proportion of a typical broad-based portfolio. In this paper we highlight some of the attractive characteristics of this often-overlooked segment of the market.

Meet Dawn Kanelleas

When she’s not gleaning new perspectives from art exhibitions large and small, Dawn Kanelleas curates a portfolio of Australia’s best up-and-coming companies.

Questions your client might ask about investing in Australian Small and Mid Cap Companies

How can you tell the difference between large caps, mid caps and small caps?

Market capitalisation, a multiplication of a company’s share price by the number of outstanding shares, is commonly used to rank companies on indices around the world.  Well known capitalisation indices in Australia include:

  1. S&P/ASX 100 Index; Australia’s largest 100 companies. Approximate market cap between $130bn to $3bn.
  2. S&P/ASX 300 Index; a broad-based index covering both large and small caps. Approximate market cap between $130bn to $100m.
  3. S&P/ASX Small Ordinaries Index; this includes companies in the S&P/ASX 300, but outside of the S&P/ASX 100. Approximate market cap between $3bn to $100m.

There are also less well-known indices, such as the S&P/ASX 50 Index which comprises the largest 50 companies, and the S&P/ASX MidCap 50, which includes companies within the S&P/ASX 100, but not those within the S&P/ASX 50.

Am I exposed to mid caps in a broad share market exposure?

Due to the concentrated nature of the Australian share market, roughly 76% of an ASX 300 portfolio – and fund manager’s attention – would be invested in Australia’s top 50 companies. The remaining market capitalisation of the ASX 300 is split roughly evenly between mid caps (13%) and small caps (11%). Such a relatively small exposure means that investors may be missing out on a rich seam of successful, growing companies which characterise the mid cap space.

Mid caps have a number of attractive characteristics for investors. Not least, they have outperformed the S&P/ASX 50 Index over one, three, five, seven and ten years as at 30 June 2020. Despite this consistent outperformance, mid caps usually comprise only a small proportion of broad-based portfolios which invest in the S&P/ ASX 300, and are omitted altogether in small cap portfolios which are limited to the S&P/ASX Small Ordinaries Index.

What are the benefits of a mid cap stock?

An important characteristic of the mid cap universe is the sector diversification it offers investors. Most apparent is the reduced exposure to the Financials and increased exposure to Australia’s growing IT sector. Mid caps also provide relatively more exposure to Communication Services, Consumer Discretionary and Industrials than large caps. Because mid cap sector exposure is more evenly distributed across market sectors, they are less susceptible to movements due to macro themes, such as weakening commodity prices. This particularly suits bottom-up stock pickers, as good companies are rewarded on their merit, rather than the prevailing market sentiment. 

What is the difference between small caps and large caps?

Most stocks in the large cap S&P/ASX 100 Index are extensively researched by the professional investment community. They are mostly well known, mature companies with a large shareholder base. Investors like to hold large, mature companies because they are generally considered to be more predictable and less risky than their small cap counterparts. In contrast, small companies tend to be less well researched and understood. This provides opportunity for skilled small cap managers to identify - through their own extensive research, resources and experience - companies that have the potential to be future leaders, and companies that have the propensity to fail. By picking the winners and avoiding the losers, there is potential for significant generation of above market returns.

Why do actively managed small cap portfolios often outperform actively managed large cap portfolios?

There are many high-quality small companies operating across all areas of the Australian economy. Some of these companies will one day grow into large, mature businesses. Identifying these stocks at the beginning of their journey provides investors with the potential for significant capital growth along the way. As small companies flourish, revenue and earnings growth are typically expanding at their fastest point in the company’s lifecycle – growth that larger, more mature companies would find difficult to replicate.

On the flip side there are many poor-quality companies in the S&P/ASX Small Ordinaries Index. Just as some companies will become large, successful businesses, other companies will spend years floundering, or fall victim to unfavourable market conditions or poor management decisions. Investing in these companies can result in significant (or total) capital loss.

Do small cap funds offer attractive returns?

The S&P/ASX Small Ordinaries Index has higher volatility than the S&P/ASX 100 Index, but has potential for strong growth with the stock selection expertise of a professional small cap manager. 

In the S&P/ASX Small Ordinaries Index, the negative returns from numerous low-quality companies often erode the value created from more successful businesses. This means attempts to mitigate risk by diversifying across the index, for example via passive investments or low active share, is often not the optimal strategy for investors with regards to the risk/reward outcome. The comparison of returns from the S&P/ASX 100 Index and S&P/ASX Small Ordinaries Index is too simplistic for one important reason; the index returns ignore the impact of above market returns that active managers can produce, which can be particularly significant in small caps.

Investors should consult with a financial adviser to discuss whether an investment is appropriate for an individual’s investment objectives and risk appetite, and to assess a fund manager’s track record and risk management process.

Meet the Australian Small and Mid Cap Companies team

Dawn Kanelleas

Head of Australian Small and Mid-Caps Companies

Michael Joukhador

Portfolio Manager

Pavlos Totsis

Portfolio Manager

Want to know more?

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