Adding microcaps to your SMSF

Five reasons why microcaps might be a good addition to your SMSF

With cash returns historically low and property investment historically high, trustees of self managed superannuation funds (SMSFs) are looking out for investment opportunities in shares. Microcaps (listed companies with a market capitalisation below $250 m) might be an interesting asset class to look at for those investors wishing to diversify their portfolio. Here are five reasons why:

1. Microcaps generally grow faster           
The more earnings a business generates, the greater its eventual value is. Microcap companies can have fast growing earnings because their products and services are in the early life stages or they may be either expanding into new markets or wining market share from other competitors.

2. Microcaps are often under-researched, under-invested, and under-valued
Microcaps are too small for the large investment banks and fund managers to deploy their expensive resources. Frequently they are not sufficiently researched and some are not researched at all. The lack of institutional following can lead to inefficient market pricing and undervalued companies. Hence, it is possible to buy these companies at a discount.

3. Microcaps’ growth is not reliant on economic conditions
Due to their relative size and inherent growth drivers, Microcaps often have company specific reasons for growing. Therefore, microcaps can provide investors with growth that is not necessarily dependent on prevailing economic conditions on which ANZ or Woolworths would be dependent.

4. Microcap asset class can deliver long-term strong out-performance against benchmark equity indices.

5. Some of today’s biggest Australian companies were previously microcaps
Cochlear, JB Hifi, CSL, iiNet, M2 Telecommunications, Technology One – all these companies were previously Microcaps and long-term investors who held their shares in these businesses have been rewarded with exceptional returns.

According to Microcap specialist fund manager Carlos Gil, Chief Investment Officer at Microequities Asset Management, “Microcaps offer SMSF investors excellent capital growth opportunities within the context of long term investment commitment which is well-suited with SMSF Trustees”. 

Gil recommends potential microcap investors to minimise risk by searching for high-reward opportunities within a tolerable level of risk. “Research and due diligence are essential in this asset class and we always recommend that if an investor does not have the time, skill set or necessary resources to undertake research, they should use a specialised Microcap Fund Manager. Currently, around 60% of Microequities’ clients are SMSF trustees”. 

Microequities flagship fund – the Deep Value Microcap Fund – has returned a +27.45 per cent Compound Annual Return since inception in 2009 (after all fees) and has a 5-star Morningstar Rating as at 31/07/2015 *. 

(*) The Morningstar Rating is an assessment of a fund’s past performance – based on both return and risk – which shows how similar investments compare with their competitors. A high rating alone is insufficient basis for an investment decision. © 2014 Morningstar, Inc. All rights reserved. Neither Morningstar, its affiliates, nor the content providers guarantee the data or content contained herein to be accurate, complete or timely nor will they have any liability for its use or distribution. Any general advice or ‘class service’ have 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. Refer to our Financial Service Guide (FSG) for more information at www.morningstar.com.au/s/fsg.pdf. You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement (Australian products) or Investment Statement (New Zealand products) before making any decision to invest. Our publications, ratings and products should be viewed as an additional investment resource, not as your sole source of information. Past performance does not necessary indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Some material is copyright and published under licence from ASX Operations Pty Ltd ACN 004 523 782 (“ASXO”).

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