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Out now - Better Investor Update
Expert market, economic and investment commentary.
Bigger isn't always better
December 2007:
With the top 100 companies accounting for around 80% of the value of the Australian Stock Exchange (ASX), it’s probably not surprising that our biggest companies get all the market and media attention. But often it’s the smaller companies — the ones we don’t always hear about — that actually have the most potential to generate strong investment returns over the long-term.
Since early 2003, when the current share market boom began, Australian shares have returned an impressive 131.1%1. By contrast, the S&P/ASX Small Ordinaries Index, which measures the performance of the Australian Small Caps sector, has returned an even better 166.5%.
Much like their larger counterparts, smaller companies have benefited significantly from the strong growth of the Australian economy. But there are a number of key themes that have emerged in the small caps space in recent years that have underpinned the sector’s strong performance, making smaller companies an attractive investment opportunity.
Firstly, many smaller companies fly under the radar of the big broking and research houses, meaning that they are more likely to trade below their true market value because their growth potential perhaps hasn’t yet been realised. Sometimes, today’s smaller companies go on to become tomorrow’s market leaders, so early discovery of these companies can result in excellent returns over the long-term.
Secondly, there exists a general belief that small caps have the ability to provide significant returns through strong management teams. Many of Australia’s smaller companies have very sound management, and this has contributed to their dramatic growth in the last couple of years, with some having even transitioned out of the small caps space and into the ASX’s top 100.
Thirdly, smaller companies tend to do well when the economy is strong, since a lot of their performance is based on servicing bigger companies – often it pays to invest in the companies that sell the picks and shovels and not those that own the mines, so to speak. Needless to say, this trend has strengthened over the last couple of years as the Australian economy has grown and outsourcing has become a key business strategy for much larger companies.
Finally, the strong performance of select small caps has seen a rise in the level of income returned to investors. Traditionally, it’s been larger and more established companies that have provided investors with high income returns, since smaller companies have typically reinvested their earnings to fund future growth. But this trend has changed in recent years, with many smaller companies now able to meet their capital expenditure needs as well as pay additional income to investors.
The Australian economy is currently undergoing one of its biggest expansions ever and whilst there are some short-term risks stemming from recent global market volatility, the long-term outlook for the Small Caps sector remains positive. And with company balance sheets and cash flows remaining strong, now may be an opportune time to capitalise on the upside growth potential of many of Australia’s smaller companies.
1_Australian share market measured by the S&P/ASX All Ordinaries Index (1 March 2003 to 30 November 2007).
The BT Smaller Companies Fund
The BT Smaller Companies Fund offers investors the opportunity to tap into the long-term growth potential of the small caps market sector. It’s an actively managed fund that invests in companies outside of the top 100 listed on the ASX (and their equivalent on the New Zealand Stock Exchange) that BT believes are trading below their true market value.
Since its inception way back in 1987, the fund has consistently provided investors with strong investment performance against its benchmark, the S&P/ASX Small Ordinaries Accumulation Index.
Fund Performance
| 1 year | 3 years (pa) | 5 years (pa) | Since inception (pa) | |
| BT Smaller Companies Fund | 27.63% | 26.93% | 32.02% | 14.46% |
| S&P/ASX Small Ordinaries Accumulation Index | 24.80% | 24.28% | 26.82% | 6.83% |
Underpinning these strong returns is the Small Caps team’s consistent and disciplined investment approach, which uses fundamental research to seek out and exploit pricing inefficiencies that arise in the market place. One of the distinguishing features of this approach is the team’s extensive company visitation program, which involves company visits, contact with competitors and suppliers, and financial analysis and peer group comparison, both here and overseas.
This investment approach, together with the Small Caps team’s proven performance record, has also received recognition from across the Australian funds management industry. In fact, we’ve just won silver from Money Magazine’s Best of the Best for 2008 — a nice addition to our 2006 Financial Review Smart Investor Blue Ribbon Award in the Investment category and our Best Small Caps Manager award from the 2005 Standard & Poor’s Australian Fund Awards.
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Like to know more? If you’d like to know more about investing in BT’s Smaller Companies Fund:
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Things you should know
All performance data is to 30 November 2007 and is post-fees, pre-tax. Past performance is not a reliable indicator of future performance. This information has been prepared without taking account of your objectives, financial situation or needs. Because of this you should, before acting on this information, consider its appropriateness, having regard to your objectives, financial situation and needs. BT Funds Management Limited ABN 63 002 916 458 is the responsible entity and issuer of units in the BT Smaller Companies Fund. A Product Disclosure Statement (PDS) is available for the Fund and can be obtained by calling 132 135 or visiting www.bt.com.au . You should obtain and consider the PDS or other disclosure document before deciding whether to acquire, continue to hold or dispose of units in the Fund. An investment in the product is not an investment in, deposit with or any other liability of Westpac Banking Corporation ABN 33 007 457 141 (the Bank) or any other company in the Westpac Group. It is subject to investment risk, including possible delays in repayment of withdrawal proceeds and loss of income and principal invested. The Bank is not the issuer of the product. Neither the Bank nor any other company in the Westpac Group stands behind or otherwise guarantees the capital value or investment performance of the product(s).