5 quality stocks for an ASX small-cap revival

"These are the companies that are going to move from small-cap land to large-cap land one day and you can generate some really significant alpha from," he says. 

He also loves founder-led companies, noting that the Fund has never had less than 30% of the portfolio invested in founder-backed businesses. Championing founders appears to be working - the Fund has outperformed its benchmark by 5.35% p.a. since its inception in October 2019. Over the past 12 months, it's returned 21.07% (compared to the Small Ordinaries' 18.76%). 

So, why should investors be turning their attention to small caps now? Particularly, given managers have been talking about a revival in small caps for the good part of a year. 

"There's a really large divergence in performance between large companies and small companies, and we're at extreme levels at the moment," Higgins says. 

He believes the growth in Aussie large caps has been driven by offshore funds looking to invest in the Asia Pacific (but perhaps, not in China) - which has driven up the valuations of our banks. 

Now that investors are once again looking to China to invest, we could see some mean reversion, Higgins says. There are also plenty of small-cap stocks that are growing irrelevant of the cycle that continue to go unnoticed by investors. 

In this Fund in Focus, Higgins shares some of the founder-led stocks that the Dynamic Small Companies Fund is backing today, a classic 'growth at a reasonable price' play that has so far been ignored by the market, and outlines what makes this strategy unique compared to the myriad of other small-cap funds available to Australian investors. 

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