size matters

Size Matters: Why The Little Guys Will Keep Winning

Pick up any financial press and you’ll notice the same old companies getting mentioned over and again.

The big miners, big banks and our big telco tend to dominate the papers day in day out…which is great if you’re interested in them, and even better if they’re rolled up in your share portfolio.

But what about the little guys screaming for attention, where’s there coverage?

You’ll need to trawl through blogs and specialist sector journals to find any gossip on the small end of town, which is both tricky to filter and sometimes hard to find.

This is one of the reasons that a lot of people are comfortable investing in big, familiar names, and leave the little guys to speculators and sophisticated investors.

But therein lies an opportunity.

While small stocks are harder to research, less covered by analysts and often entail more risk than the more familiar names, the rewards can be significant for those willing to do the work and roll the dice.

That’s been the case in 2015, where the benchmark small-cap index, the ASX Small Ordinaries, has comprehensively beaten big company returns.

And there’s a pretty good reason to suggest that outperformance could continue into the second half of the year.

Since the start of the year, the ASX Small Ordinaries has gained 5.99 per cent, according to the people who put the numbers together at S&P Dow Jones.

Pin that up against the largest 50 companies, largest 200 companies or even the broader All Ordinaries Index (which captures the 500 largest companies on the Aussie exchange) and it looks pretty darn good.

share performance

Courtesy: S&P Dow Jones Website

And while shares have been a bit slippery of late, small cap stocks could be in for another leg up in the new financial year as changes to Significant Investor Visa (SIV) laws open these investments up to a flush of foreign money.

In a nutshell, foreigners can effectively buy an Australian visa by investing a minimum of $A5 million into Australia over the course of four years.

Up until now, this is money that was being poured into property and government bonds.

However, from July 1, a minimum 40 per cent of that $5 million investment needs to be into high risk equity investments.

Under the new arrangements, SIV applicants will be required to invest:

  • At least $500,000 in eligible Australian venture capital or growth private equity funds investing in start-up and small private companies.
  • At least $1.5 million in an eligible managed funds or Listed Investment Companies (LICs) that invest in emerging companies (small caps) listed on the ASX; and
  • A ‘balancing investment’ of up to $3 million in managed funds or LICs that invest in a combination of eligible assets that include other ASX listed companies, eligible corporate bonds or notes, annuities and real property (subject to the 10 per cent limit on residential real estate).

So, on the back of that, the small cap punch bowl looks like it could be topped up very shortly. Not that you’d read about it in the papers.

Image: Steven Guzzardi, via Flickr