VanEck: Global small caps overlooked in Australia

Oksana Patron

5 June 2023

Global small-caps, which are underrepresented in Australia, have outperformed over the long term international large and mid-caps peers as well as Australian small-caps, the VanEck’s research found.

According to the firm’s chief executive and managing director, Arian Neiron, Aussie investors were traditionally attracted to domestic small caps, even though this asset class consistently underperformed its large and mid-cap counterparts.

“Unlike Australian small companies, global small caps have historically demonstrated outperformance relative to large companies over the long term,” Neiron said.

“We think Australian investors are overlooking an opportunity by only investing in small companies closer to home.”

He said that part of the blame was due to the fact that many small unprofitable mining companies listed on the Australian Stock Exchange (ASX) were in the ‘infant’ stage of the business cycle to raise capital for exploration or mine development and this was less common globally, as offshore exchanges had stricter rules around profitability and financial viability requirements for listing.

Also, weaker listing requirements at home meant Australian small-caps had almost double the exposure to non-profitable companies, compared to global.

The research also stressed that that global small-caps, in the context of market size, would be characterised as mid-caps in Australia when measured by market capitalisation.

“The higher average market capitalisation of global small-caps relative to Australian small-caps implies that these companies are more established businesses in the ‘growth’ phase of the business cycle. This means that sales and earnings growth are likely to be more of a feature of global small companies.

“We believe allocating to global small caps should be an integral part of investors’ satellite portfolio strategy, the way they invest in Australian small companies. Like here though, investors need to be selective because the global small-cap universe is littered with haves and have-nots,” Neiron added.