Small companies not small anymore

01-Oct-2015

By Wouter Klijn

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The S&P/ASX Small Ordinaries Index is no longer a proper measure for small companies, according to fund manager SG Hiscock.

As a result, the manager will change the benchmark of its small companies fund and will rename the fund to reflect the decision.

“Since its inception, the focus of the SGH Small Companies Fund has been to invest in companies with market capitalisations of less than $500 million,” SG Hiscock managing director Stephen Hiscock said in a letter to investors.

“This is the breeding ground for the best growth opportunities on the Australian Securities Exchange (ASX).

“However, over time changes to the S&P/ASX Small Ordinaries Index mean that the average market capitalisation of index stocks is now approaching $900 million and the largest stock in this index now has a market capitalisation of more than $5 billion.”

Hiscock said less than 15 per cent of the index was represented by companies with market capitalisations less than $500 million.

He said he would change the benchmark of the fund to the S&P/ASX Emerging Companies Index as of 1 October.

The emerging companies index gives exposure to 200 companies that rank outside the ASX 300 largest companies and are less liquid and often under-researched.

The fund will be renamed as the SGH Emerging Companies Fund.

Small cap manager and chief investment officer of Celeste Funds Management Frank Villante welcomed Hiscock’s decision.

“I think the SG Hiscock sensitivity to what is the real small cap space is a good thing,” he told theinstoreport.

“Hopefully, it causes people to think a little more about what a real small cap is and what is not,” he said.

Villante said companies with a market capitalisation of $500 million and below would certainly qualify as small caps, but he used a broader definition.

“For me, the small caps are anything that is outside of the ASX 100,” he said.

“And the greater irritation is when people describing themselves as small cap managers, but have a portion of their assets in stocks numbered 51 to 100.

“The blending of mid cap and small cap [while] promoting yourself as a small cap [manager] is quite common, but a misrepresentation at best and fraudulent at worst,” he said.

“A small cap manager who is true to brand has about 8 - 9 per cent of the index to play with.

“If you add stocks 51 to 100 then you add another 8 - 9 per cent of the index.

“In essence, we aren’t playing in the same opportunity set,” he said.

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