Investors looking to include small-cap and mid-cap companies in their portfolios will increase the probability of generating better returns from this market segment if they include allocations to global markets and overseas exchanges, a specialist fund manager has said.
“The small-cap and mid-cap market here in Australia is a very, very well-fished one. There are more fund managers in Australia [participating in this space] than there are stocks. So it’s an extraordinarily over-managed market and that makes it very competitive,” Forager Funds Management chief investment officer Steve Johnson told delegates at the Australian Shareholders’ Association Conference 2021 held in Sydney recently.
“But if we’re looking in that $100 million to $500 million [market cap] bucket, that I think is a bit of a sweet spot for small-cap stocks. You’ve got less than 1000 companies here in Australia that meet that criteria. In fact, the number is about 250 or 260.
“If you’re looking at that same space globally, you’ve got more than 10,000 potential companies that fit into that market cap [band].”
According to Johnson, the increased number of small-cap investment opportunities available to individuals stemming from international markets is not an automatic guarantee good returns can be generated from all of these companies.
“The amount of choice that you’re faced with there can make life more difficult, not better, but I think if you’ve got deep areas of expertise, the more stocks you have in that particular area of expertise, the more chance that one of them is going to be trading at an attractive price at any point in time,” he noted.
While the returns from Australian shares had been good over the past 15 years, he pointed out overseas markets had also performed well during this period and gave individuals a further reason to consider investing globally.
“Importantly, those returns [from global markets] have come at a different time [to the ones generated by the Australian share market],” he noted.''