The microcap sector of the Australian sharemarket was a happy hunting ground for active fund managers in 2016/17. While active managers struggled to beat their benchmarks in a number of investment markets last financial year, the majority of microcap managers outperformed the ASX Emerging Companies Accumulation Index – some by big margins.
The index, which tracks the performance of 200 companies ranked between 350 and 600 by capitalisation (and subject to a liquidity test), fell 2.8 per cent in the year to June.
Independent Investment Research tracked the returns of 26 microcap funds and listed investment companies. The Forager Australian Share Fund produced the best result, with a return of 25.2 per cent over the 12 months.
In June, IIR gave the Forager fund a ‘recommended plus’ rating, saying it was a consistent long-term performer and a good source of equity diversification.
Several other managers produced returns above 20 per cent: Cromwell Phoenix Opportunities Fund was up 24.4 per cent; Terra Capital New Horizons was up 24.3 per cent; and Microequities High Income Value was up 22.5 per cent.
The average return of the 26 managers was 10.8 per cent. Longer term, the median microcap manager return was 18.8 per cent a year over the past five years.
“This part of the market can be a great alpha generator for managers who put the work in,” IIR says.
Active fund managers have struggled to beat benchmarks in a number of sectors in recent times.
According to Zenith Investment Partners’ latest Property Sector Report, 25 per cent of active Australian property securities funds in Zenith’s universe of managers beat the S&P/ASX 300 REIT Accumulation Index in calendar 2016.
And only 20 per cent of the active global property securities funds in the Zenith universe beat their index, the FTSE EPRA/NAREIT Developed A$ (Hedged) Index, over the same period.
Morningstar’s latest Global Equity Sector Wrap reveals that local actively managed global equity funds underperformed index fund returns in 2016 – the fourth year in a row and the sixth year out of the last 10 that active has been beaten by passive in the global equity segment.
Sixty per cent of the funds in Morningstar’s sample actually outperformed but poor performance by big fund managers in the sector, Platinum and Magellan, had a big influence on overall returns.
However, when Morningstar applied the average investment management fee of 1.25 per cent, the proportion of outperformers fell to 50 per cent.
