The top end of the share market has been struggling to give a return worth talking about so far this financial year.
Today the ASX 200 index is down about 2.7% since the previous year closed on June 30.
The Future Fund, Australia’s sovereign investment vehicle, posted returns of just 0.2% for the first nine months of the financial year. This is for a fund which has grown 7.4% a year since it started.
Superannuation funds also are feeling the pinch. The median balanced option returned 1.4% in April as the market extended its recovery despite choppy global conditions. But the financial year-to-date return is at a fragile 1.7%, a long way from the 9.6% of 2015.
However, the small cap companies have been quietly outperforming the big companies.
The S&P/ASX MidCap 50 are mid level companies made up of the next 50 companies after the top 50 by market cap. The index represents around 11% of the Australian share market by market cap.
The S&P/ASX MidCap 50 share index hit an eight year high of 5,523 last week. The index has been returning 10.8% a year for the last five years.
According to CommSec, the index outperformed other size-determined indexes in 2014 and 2015 and is on track to repeat this for a third straight financial year.
So far this financial year the MidCap 50 index is up by almost 14%.
Over at UBS, small cap portfolio manager Stephen Wood, is upbeat about the entrepreneurial companies sitting in the shadows of the big players on he ASX.
“It’s just wonderful to see the index constantly being refreshed,” he says. “New things, new ideas and innovations.”
Many of the top performers are not covered by existing research.
“We don’t rely on brokers to do the modelling for us,” Wood says.
“We want tail winds for our businesses not headwinds. Some of the themes are digital, energy and environmental, demographics and materials
“We do look for broad themes in the economy which are providing what we consider sustainable growth.
“In demographics, we know the baby boomers are all about to start retiring. We have some bets in that space including Ingenia, Gateway (Lifestyle) and a New Zealand company called Somerset. Those are our bets in retirement living.”
Another theme is the growing middle class in China. Wood is a believer in Blackmores, Australia’s most expensive stock, and its sales of vitamins and baby formula. He also has a holding in China exposure is Vitaco, a nutritional products company.
In August last, UBS launched a small cap fund compliant with the federal government’s SIV (Significant and Premium Investor Visa Programmes) where an overseas investor with $5 million can get a resident’s visa.
This fund is up about 17% since then while the ASXD 200 has dropped almost 3%.
Here are the top performing small caps as picked by Wood and his team at UBS as at March: