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* This is an annualised interest rate from the past seven days. For actual performance for our Cash Funds, please view the performance page.
Performance returns are calculated net of management fees and transaction costs. Performance returns for periods greater than one year are annualised. Past performance is not a reliable indicator of future performance.
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.
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
A small company to watch
NEXTDC, a premier data centre operator, is just one of many high-quality small companies operating across all areas of the Australian economy.
By favouring companies with sustainable competitive advantages, strong financials and predictable earnings, we seek to deliver superior returns and minimise downside risks. Value is discovered through a bottom-up investment approach.
Stock price performance of NEXTDC on the ASX
Source: Bloomberg. Data to 30 June 2020.
More data than stars
There will be 40 times more bytes of data than stars in the known universe by 2020, according to the World Economic Forum.
The team invested in Australian data centre operator NEXTDC in 2014 because they could see that organisations’ data requirements are becoming so large, there is little choice but to outsource to the professionals.
NEXTDC generates strong cash flow from long term customer contracts – and their clients’ growing data demands. Given the exponential pace of demand, NEXTDC can confidently reinvest this cash flow in even more data capacity, delivering returns to shareholders above their cost of capital.
Today, NEXTDC remains a significant position in the small company portfolios. As corporate Australia experiments with new technologies such as Blockchain, 5G and Artificial Intelligence, we expect the demand for NEXTDC’s access to popular cloud vendors will grow.
1. FY18 results restated for comparability in this document (unless otherwise indicated) according to new accounting standards AASB 9, AASB 15 and AASB 16, which NEXTDC adopted on 1 July 2018.
2.FY19 figures exclude distribution income from NEXTDC’s investment in Asia Pacific Data Centre Group (APDC) of $1.3m, transaction costs (including landholder duty) related to the acquisition and wind up of APDC of $9.0m, gains on extinguishment of property leases of $2.4m, as well as costs related to review works in Singapore and Japan of $0.8m. FY18 figures exclude APDC distribution income of $3.2m and APDC transaction costs of $1.8m.
NEXTDC FY19 Results, 29 August 2019.
Head of Australian Small and Mid-Caps Companies
The niche where function always trumps fashion
Small appliance company Breville is an iconic Australian success story. While many of its competitors are price and fashion led, Breville is truly engineering led, solving consumer problems with a broad range of innovative appliances including an exceptional range of coffee, toastie, waffle and pizza makers.
It has flawlessly executed a fast growing and sustainable expansion into niche but highly scalable markets in the US, UK and Europe. While we have owned and followed this stock for some time, management quality is one of the key drivers of conviction, and our position has built up in line with increasing confidence around the strategy put in place by CEO Jim Clayton.
He has been the steward of the business since July 2015, constructing a recipe for success through supply chain redesign. The company facilitates direct fulfilment and has invested in product research and development and increased marketing support.
In Australia and New Zealand, Breville earned $124 million in sales in 2019, which they doubled in the United States. In Europe they earned half, but at current growth rates of 35%, Europe is poised to pass Breville’s home market in the near future.
Any stock mentioned does not constitute an offer or inducement to enter into any investment activity.
Responsible investment is led by engagement
Our assessment of Australian small and mid cap companies includes criteria related to practice, commitment and disclosure of ESG issues by company management, and performance relative to peers. As part of our commitment to responsible investment, we have active, direct dialogue with many company board members and senior management on material ESG issues.
In 2019, senior management from Iress approached our team to discuss revising their long-term incentive plans. We welcomed the opportunity to contribute to the development of effective long term incentive structures for senior executives. This helped foster alignment and ensured appropriate stewardship accountabilities towards stakeholders and the future of the businesses. Iress continues to be an overweight position in our portfolios.
Any stock mentioned does not constitute an offer or inducement to enter into any investment activity.
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 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:
- S&P/ASX 100 Index; Australia’s largest 100 companies. Approximate market cap between $130bn to $3bn.
- S&P/ASX 300 Index; a broad-based index covering both large and small caps. Approximate market cap between $130bn to $100m.
- 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.
Our corporate RI strategy is based upon three strategic pillars of quality, stewardship and engagement.
We consider ESG risks to be factors that may place business value at risk. Companies at risk are identified using both external providers and our own internally driven research, which is based on a systematic and extensive company meeting program. Company meetings provide us with the opportunity to engage on ESG issues and gain greater insight into potential risks and opportunities. It also provides us with the opportunity to positively influence companies towards ESG best practice where appropriate.