ASX microcaps knocking it out of the ground Microcap Manager Review Q32020

After a sustained period of underperformance, ASX microcaps are back! ASX microcaps have underperformed their slightly larger cousins small caps and their bigger large caps cousins over recent years. However, over the course of a tumultuous 2020, they have caught up this underperformance and have now raced ahead on a 1, 3, and 5-year performance basis. Intuitively and empirically microcaps should outperform large-cap stocks given they are riskier but for the last few years, ASX microcaps were lagging large caps but no longer. When I first produced this review based on June 2017 financial year-end the S&P/ASX Emerging Companies Accumulation Index had returned -0.5% annualised over 5 years versus the S&P/ASX 200 Accumulation Index had returned 11.8% annualised over the same 5 years. Fast forward to end of September 2020 and the S&P/ASX Emerging Companies Accumulation Index has returned 11.8% annualised over 5 years versus the S&P/ASX 200 Accumulation Index has returned 7.3% annualised over the same 5 years. As a fan and an advocate for microcaps, I am going to shamelessly bask in this moment.

Australia microcaps are also world-beating. As you will see from comparing the international microcap indexes, ASX microcaps are showing strong performance versus other developed markets. ASX microcaps might be lagging Candian microcaps in CY2020 but the proof is in the pudding when you look at the longer timeframes where ASX microcaps have performed head and shoulders above its international peers. This strong performance is not flying under the radar. Indeed, recent research from Alta Fox Capital in the US found that the ASX as an exchange was over-represented in terms of small and microcap multibagger stock performances over the last 5 years. Microcap investors are increasingly looking internationally for alpha and the ASX microcap market is most definitely flashing on their radar.

One other trend that is coming through is the underperformance of the microcap LIC’s versus their managed fund competitors. This is somewhat counter initiative given the volatility we have seen as LIC managers did not have redemptions turning into forced sellers in March 2020 and should have been mopping bargains from forced microcap managed fund sellers, at least that is the theory. This is something I will be watching over the coming the reviews and try and tease out some reason as to why this underperformance is appearing.

As I have noted many times before judging any fund manager’s performance contained in the review, either positive or negative over a short time frame is not a good strategy in my view. Some fund managers will have positioned their portfolios better going Q1CY20. Some fund managers will have positioned their portfolios better coming out of Q1CY20 and rode the rebound wave particularly well. Some fund managers may have even achieved both. All fund managers will have accomplished this through a combination of a little luck and by design in terms of stock selection, portfolio risk management and timing. The one-year numbers in June 2021 will give a far better insight into the alpha-generating capabilities of individual microcap managers.

I have added two new names into the overall universe: the Bombora Special Investments Growth Fund and The Capital H Inception Fund.

International microcap indexes are provided to give a sense of how the Australian microcap market is performing relative to other global microcap markets.

I produce this review every quarter.

Notes:

1. All figures are as reported by the various managers.

2. Missing figures are either not reported by the manager or not applicable.