Australian 'Microcap Fund of the Year 2020'

Before we get into the year award's for microcap fund of the year, I wanted to talk through the microcap fund manager review for Q42020. After a sustained period of underperformance, ASX microcaps have continued their stellar run. ASX microcaps had underperformed their small and large caps cousins over recent years. However, over the course of a tumultuous 2020, microcaps have caught up this underperformance and have now raced ahead of both sets of cousins on a 1, 3, and 5-year performance basis. Intuitively and empirically, microcaps should outperform large-cap and small-cap stocks given they are riskier, but ASX microcaps were lagging for the last few years 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 five years versus the S&P/ASX 200 Accumulation Index had returned 11.6% annualised over the same five years. Fast forward to end of December 2020, and the S&P/ASX Emerging Companies Accumulation Index has returned 14.3% annualised over five years versus the S&P/ASX 200 Accumulation Index which has returned 8.7% annualised over the same five years. As a fan and an advocate for microcaps, I am going to bask in this moment shamelessly.

Australian microcaps returns are also world-beating as you will see from comparing the performance versus international microcap indexes. ASX microcaps have shown strong performance versus other developed markets. ASX microcaps might have lagged Candian microcaps in CY2020. Still, the proof is in the pudding when you look at the longer timeframes where ASX microcaps have outperformed head and shoulders above international peers. This strong performance is not flying under the radar. Indeed, the previously referenced research from Alta Fox Capital in the US found that the ASX as an exchange was over-represented in small and microcap multibagger stock performances over the last five 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 result is somewhat counter initiative given the volatility we saw in 2020. LIC managers did not have redemptions turning them into forced sellers in March 2020 and should have been mopping bargains from forced microcap managed fund sellers in theory at least. This underperformance is something I will be watching over the coming the reviews and will try and tease out some reasons 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 through the rest of CY20. Some fund managers may have even achieved both. All fund managers will have accomplished some of the aforementioned through a combination of a little luck and design through stock selection, portfolio risk management and timing. The one-year numbers in June 2021 will give a far better insight into individual microcap managers' alpha-generating capabilities.

Coffee Microcaps Microcap Fund of the Year 2020

I have decided to award a "Microcap Fund of The Year" award annually moving forward. The Coffee Microcaps "Microcap Fund of the Year" seeks to highlight one fund that has delivered for its investors, outperformed its peers and its benchmark over the medium term. The winner was selected from eighteen qualifying funds which included fifteen managed funds and three listed investment companies. All funds in the qualifying group had a minimum of a five-year performance record. A scorecard approach was then taken in the selection process. Taking 50% of the five-year annualised performance, 30% of the three-year annualised performance and 20% of the one-year performance. I then took the aggerate of these three results to get an overall score for each fund. Taking this approach, I have tried to strike a reasonable balance between short and medium-term performance with a weighting to consistent medium-term returns for investors. After crunching the numbers, I delighted to announce that the inaugural Coffee Microcaps Microcap Fund of the Year 2020 is the OC Micro-Cap Fund. Congratulations to Rob Frost and all the team at OC Funds Management.

Notes:

1. All figures are as reported by the various managers.
2. Missing figures are either not reported by the manager or not applicable.
3. International microcap indexes are provided to give a sense of how the Australian microcap market is performing relative to other global microcap markets.
4. This review is produced every quarter.

Not already a Livewire member?

Sign up today to get free access to investment ideas and strategies from Australia’s leading investors.