Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 271

Which microcap funds outperformed in FY18?

The 2017-2018 financial year was strong for both microcap and small caps indexes. Once again, microcaps significantly outperformed large caps. The S&P/ASX All Ordinaries Accumulation Index returned 13.7% for FY18, a healthy return. In contrast, the S&P/ASX Emerging Companies Index posted a stellar return of 23.2% for FY18, leading to an outperformance of 9.5% for microcaps over large caps in the Australian market.

Standout manager performances

Standout performances from active managers for the year came from microcap vehicles managed by Perennial, Eley Griffiths and Acorn with FY18 returns of 50.2%, 41.9% and 30.6% respectively, all easily outpacing the index and their own selected benchmarks. Given these results are net of all fees it makes them even more impressive as the index has no fees in its performance measure.

However, as always there are the managers which lagged both the index and their peers for FY18. Managers who struggled in FY18 were 8IP, Microequities and DMX who all delivered low single-digit returns. Now, my usual caveat applies, that no investor should judge a manager on a single year’s performance no matter how positive or negative the performance was. Microcap manager returns vary significantly year-to-year, as shown in the table below.

The table gives the 1, 3, 5 and 10-year returns for fund managers who have such track records. This gives investors some perspective on the longer-term performance record of all managers. It also shows returns for the indexes over similar timeframes.

Click for pdf version

Microcap outperformance versus large caps and ETFs

Over a medium-term time horizon or longer, active microcap managers usually have an excellent track record of delivering alpha (performance above the index) to their investors as can be seen from the data. In addition, they have delivered superior returns versus mainstream index funds and ETFs.

This is continuing evidence that active microcap managers can provide attractive relative and absolute returns to investors. The data also suggests that despite an increase in the number of microcap-focused vehicles that have come to the market in the last three years, microcap managers as a group have been able to provide continued strong performance.

Standout performers over a medium-term 3-year horizon continue to be Cyan, Perpetual and Cromwell, all posting annualised returns in excess of 20%.

The curious case of the microcap benchmark

One of the most curious things about looking at the universe of microcaps managers is the disproportionate use of the S&P/ASX Small Ordinaries Accumulation Index as the benchmark for the funds and performance fee calculations. No fewer than 15 of the 28 vehicles in our universe use this index as its benchmark.

Now some of the funds in our universe could be classed as small cap funds as they straddle the line in terms of the market caps of their holdings. This makes classification a bit of a grey area. However, if we take the Perpetual Pure Microcap Fund, for example, you would think that it would use the S&P/ASX Emerging Companies Index as its benchmark given the name of the fund and its investment strategy and mandate? Yet, it uses the S&P/ASX Small Ordinaries Accumulation Index for its benchmark.

Indeed, just two funds in our universe use the S&P/ASX Emerging Companies Index as their benchmark. Now, I am not saying one benchmark is better than the other but it is curious that so many funds use a benchmark which in name at least is perhaps not the most relevant or appropriate for the fund's strategy and mandate. This is perhaps something investors current or prospective can query with the relevant managers to getter a better understanding as to why one was selected over the other.


Mark Tobin is a Senior Analyst at Independent Investment Research.



Social media’s impact is changing markets

Why caution is needed in Aussie small companies

Australian large caps outperform small caps over long term


Most viewed in recent weeks

10 reasons wealthy homeowners shouldn't receive welfare

The RBA Governor says rising house prices are due to "the design of our taxation and social security systems". The OECD says "the prolonged boom in house prices has inflated the wealth of many pensioners without impacting their pension eligibility." What's your view?

House prices surge but falls are common and coming

We tend to forget that house prices often fall. Direct lending controls are more effective than rate rises because macroprudential limits affect the volume of money for housing leaving business rates untouched.

Survey responses on pension eligibility for wealthy homeowners

The survey drew a fantastic 2,000 responses with over 1,000 comments and polar opposite views on what is good policy. Do most people believe the home should be in the age pension asset test, and what do they say?

100 Aussies: five charts on who earns, pays and owns

Any policy decision needs to recognise who is affected by a change. It pays to check the data on who pays taxes, who owns assets and who earns the income to ensure an equitable and efficient outcome.

Three good comments from the pension asset test article

With articles on the pensions assets test read about 40,000 times, 3,500 survey responses and thousands of comments, there was a lot of great reader participation. A few comments added extra insights.

The sorry saga of housing affordability and ownership

It is hard to think of any area of widespread public concern where the same policies have been pursued for so long, in the face of such incontrovertible evidence that they have failed to achieve their objectives.

Latest Updates


The 'Contrast Principle' used by super fund test failures

Rather than compare results against APRA's benchmark, large super funds which failed the YFYS performance test are using another measure such as a CPI+ target, with more favourable results to show their members.


RBA switched rate priority on house prices versus jobs

RBA Governor, Philip Lowe, says that surging house prices are not as important as full employment, but a previous Governor, Glenn Stevens, had other priorities, putting the "elevated level of house prices" first.

Investment strategies

Disruptive innovation and the Tesla valuation debate

Two prominent fund managers with strongly opposing views and techniques. Cathie Wood thinks Tesla is going to US$3,000, Rob Arnott says it's already a bubble at US$750. They debate valuing growth and disruption.


4 key materials for batteries and 9 companies that will benefit

Four key materials are required for battery production as we head towards 30X the number of electric cars. It opens exciting opportunities for Australian companies as the country aims to become a regional hub.


Why valuation multiples fail in an exponential world

Estimating the value of a company based on a multiple of earnings is a common investment analysis technique, but it is often useless. Multiples do a poor job of valuing the best growth businesses, like Microsoft.


Five value chains driving the ‘transition winners’

The ability to adapt to change makes a company more likely to sustain today’s profitability. There are five value chains plus a focus on cashflow and asset growth that the 'transition winners' are adopting.


Halving super drawdowns helps wealthy retirees most

At the start of COVID, the Government allowed early access to super, but in a strange twist, others were permitted to leave money in tax-advantaged super for another year. It helped the wealthy and should not be repeated.



© 2021 Morningstar, Inc. All rights reserved.

The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third-party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use. Any general advice or ‘regulated financial advice’ under New Zealand law has been prepared by Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892) and/or Morningstar Research Ltd, subsidiaries of Morningstar, Inc, without reference to your objectives, financial situation or needs. For more information refer to our Financial Services Guide (AU) and Financial Advice Provider Disclosure Statement (NZ). You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.

Website Development by Master Publisher.