Two asset managers have been anointed with five-star ratings from Standard & Poor’s (S&P) Fund Services in its latest survey of the Australian small-cap equities sector.

The long-term returns and “mature” strategies deployed by Eley Griffiths and Invesco ensured they retained top accolades amid strong performance and increasing competition from managers in the small-cap sector, the ratings house stated.

The ability of senior team members at both managers to pick stocks while also manage portfolios reflected their “extensive experience” in the small-caps sector, S&P stated. The managers’ processes were also capable of weathering market cycles, and allowed them to pursue stock ideas within risk frameworks.

In the 5 years to August 31, Eley Griffiths posted an 8.51 per cent return against the 2.51 per cent gain of the benchmark ASX Small Ordinaries Accumulation index, while the Invesco Smaller Australian Companies fund generated 4.12 per cent in the same time period.

The number of competitors in the small-cap sector had grown, said S&P Fund Ratings analyst Andrew Yap, a development most likely due to “renewed interest by investors who have once again been attracted to the alpha produced by small-cap funds”.

By and large, these managers have not disappointed their investors: in the year to May 2010, their average excess return was a “lofty” 9.8 per cent, well above the average return from large-cap managers, Yap said.

But investors and small-cap managers should consider that “it may become incrementally difficult for managers to reproduce these recent performance successes”.

The headwinds being faced by managers – which included economic certainty, below-trend economic growth forecasts, reduced availability of credit and regulatory change – meant that “in [the] future, a manager’s ability to meet [their] objectives will become increasingly reliant on the stability and skill of its investment personnel, a proven investment process and a resilient risk framework,” Yap said.

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