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.

 

RELATED ARTICLES

Is now the time to invest in small caps?

Size doesn’t matter when it comes to risk

Social media’s impact is changing markets

banner

Most viewed in recent weeks

Simple maths says the AI investment boom ends badly

This AI cycle feels less like a revolution and more like a rerun. Just like fibre in 2000, shale in 2014, and cannabis in 2019, the technology or product is real but the capital cycle will be brutal. Investors beware.

Why we should follow Canada and cut migration

An explosion in low-skilled migration to Australia has depressed wages, killed productivity, and cut rental vacancy rates to near decades-lows. It’s time both sides of politics addressed the issue.

Are LICs licked?

LICs are continuing to struggle with large discounts and frustrated investors are wondering whether it’s worth holding onto them. This explains why the next 6-12 months will be make or break for many LICs.

Australian house price speculators: What were you thinking?

Australian housing’s 50-year boom was driven by falling rates and rising borrowing power — not rent or yield. With those drivers exhausted, future returns must reconcile with economic fundamentals. Are we ready?

Retirement income expectations hit new highs

Younger Australians think they’ll need $100k a year in retirement - nearly double what current retirees spend. Expectations are rising fast, but are they realistic or just another case of lifestyle inflation?

Welcome to Firstlinks Edition 627 with weekend update

This week, I got the news that my mother has dementia. It came shortly after my father received the same diagnosis. This is a meditation on getting old and my regrets in not getting my parents’ affairs in order sooner.

  • 4 September 2025

Latest Updates

Shares

Why the ASX may be more expensive than the US market

On every valuation metric, the US appears significantly more expensive than Australia. However, American companies are also much more profitable than ours, which means the ASX may be more overvalued than most think.

Economy

No one holds the government to account on spending

Government spending is out of control and there's little sign that Labor will curb it. We need enforceable rules on spending and an empowered budget office to ensure governments act responsibly with taxpayers money.

Retirement

Why a traditional retirement may be pushed back 25 years

The idea of stopping work during your sixties is a man-made concept from another age. In a world where many jobs are knowledge based and can be done from anywhere, it may no longer make much sense at all.

Shares

The quiet winners of AI competition

The tech giants are in a money-throwing contest to secure AI supremacy and may fall short of high investor expectations. The companies supplying this arms race could offer a more attractive way to play AI adoption.

Preparing for aged care

Whether for yourself or a family member, it’s never too early to start thinking about aged care. This looks at the best ways to plan ahead, as well as the changes coming to aged care from November 1 this year.

Infrastructure

Renewable energy investment: gloom or boom?

ESG investing has fallen out of favour with many investors, and Trump's anti-green policies haven't helped. Yet, renewables investment is still surging, which could prove a boon for infrastructure companies.

Investing

The enduring wisdom of John Bogle in five quotes

From buying the whole market to controlling emotions, John Bogle’s legendary advice reminds investors that patience, discipline, and low costs are the keys to investment success in any market environment.

Sponsors

Alliances

© 2025 Morningstar, Inc. All rights reserved.

Disclaimer
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. To the extent any content is general advice, it has been prepared for clients of Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), without reference to your financial objectives, situation or needs. For more information refer to our Financial Services Guide. 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.