INVESTORS ENJOY FLOATING FEELINGSmall capsBrenden LauInvestors...

INVESTORS ENJOY FLOATING FEELING

Small caps
Brenden Lau

Investors who bought small caps coming out of the financial crisis in early 2009 would be smilimg all the way to the bank, but their grin wouldn't be as wide as those who bought newly listed shares.

While the S&P/ASX Small Ordinaries Index would have doubled investors' capital in the past 25 months on a total return basis, the Bloomberg IPO Index has generated a stunning gain of 152 per cent over the period. The index for initial public offerings is market weighted and measures the first-year performance of newly listed shares.

New floats have continued to outperform since the start of the calendar year, with the index gaining 9 per cent compared with a 2.2 per cent loss by the small ordinaries.

The best performer in the IPO index is gold and base metal explorer Fortis Mining, which has surged 660 per cent since January. Algae-based energy developer Algae.Tec has jumped 260 per cent and junior mining hopeful Bailey Minerals is ahead 186 per cent.

Almost every stock in the IPO index is a small cap, with only three of 117 stocks having a market capitalisation greater than $750 million. Almost 80 per cent of constituents have a market value of less than $100 million.

The question for small-cap investors is whether these minnows can continue to create alpha returns - those which outrun the broader market on a risk-adjusted basis.

This space is a gold mine of alpha opportunities as they are largely under-researched by brokers and hold names that are not familiar to investors.


(Source: "The Australian Financial Review", 27 April 2011, p.29)