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Resource sector dip positive for small caps

A review of Australian small caps has found the end of the resources boom, while diminishing overall performance of the sector, has had a positive effect on the structure of this market segment.

Research house Lonsec came to this conclusion as the weighting to resource companies in the sector was falling as a result of the decline in value of resource equities.

“This is leading to a healthier balance of companies and industries within the popular sector,” Lonsec analyst Nick Thomas said.

“The poor performance of resources has become a well-worn theme for small caps, persisting for the past four years.

“More recently, the main drags within the sector have been iron ore, gold and energy companies, and this has also flowed through to put pressure on companies within the mining services sector.”

Lonsec found small resource companies experienced a 28.4 per cent decline in value in 2014, which dominated the 3.8 per cent fall in the ASX S&P Small Ordinaries Index.

The decrease in small resource company shares overshadowed the 2.8 per cent boost in value small industrials recorded in the year.

The research house revealed fund managers who had reweighted their portfolios away from resources outperformed the index by 6 per cent, delivering a 2.2 per cent gain compared with a 3.8 per cent loss.

“Fund managers who have shown strong industrial stock selection, as well as avoiding the blow-ups in mining and mining services, have produced solid returns during the past three years,” Thomas said.

The lower index weighting of small resource companies has seen consumer discretionary, financial, telecommunication and healthcare stocks now play a larger role.

“The number of new public offerings in the past two years has also helped this trend,” Thomas said.

“Overall, the balance and diversity within the index now looks far healthier.”

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