Angela Burmeister

Bigger is not necessarily better in the small-cap funds manager stakes as results from this year’s Zenith Investment Partners’ research shows.

Of the 44 funds in the race, three rated highly recommended and nine recommended.

Two new funds were added to Zenith’s ‘recommended’ list, and one fund was upgraded to highly recommended.

Analyst Angela Burmeister said this year Zenith had divided the sector into mid-cap and small-cap funds, due to their different characteristics and diverse risk/return profiles.

The mid-cap highly recommended gong went to Ausbil Emerging Leaders Fund, with the BT Midcap and Concise Midcap funds gaining recommended ratings.

In small-caps, the highly recommended upgrade went to Celeste Australian Small Companies Fund, while Eley Griffiths Group Small Companies Fund won highly recommended.

Two news funds won recommended: Grant Samuel Australian Smaller Companies Fund, and Zurich Small Companies Fund. (The complete list of recommended funds is at the end of this article.)

Zenith’s Burmeister said that in the relatively small Australian equities market, capacity was important when selecting a managed fund because high levels of FUM could limit managers’ abilities to enter or exit a stock at the desired market price.

Excessive FUM levels were “particularly pertinent” in the small cap sector, she said, due to the inherently lower liquidity of these stocks.

Consequently, Zenith did capacity studies on funds where higher levels of FUM were a potential concern.

Burmeister said Zenith found “that many managers are cognisant of their capacity levels and willing to close their funds as volume is reached, rightly believing that providing superior returns to investors is a priority”.

However, other factors could impair liquidity, she said. High-conviction or concentrated funds took larger individual positions in each stock, and therefore significant proportions of a company’s issued capital.

A fund’s market capitalisation bias dictated liquidity to a large extent, she said, so a fund which invested in small- or micro-cap stocks only might have significantly lower liquidity than funds with a bias to mid-or large-cap stocks.

“Other factors that exert an influence include the portfolio turnover level, fund inflows and outflows, trading efficiencies, the liquidity levels of individual stocks and the fund’s investment style,” she said.

Funds with a longer investment time frame had lower turnover and therefore liquidity would be less of an issue.

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