...too often small cap companies have had misled retail investors, blindisiding them no less, which does not give the confidence for large instos funds and super funds to want to bother with them.
...with less to no proper due diligence ability of retail investors who often chase rising prices, they can easily be manipulated into an exuberance storm to bid prices higher so companies can hit them with an unexpected CR that has to be made on a discount.
...one wonders if small cap speculation is ever going to be as 'easy' as it was in 2017 and 2020. Too many have not delivered the growth narrative that had pushed their stock into multi-bags. Super and passive are remaking the ASX. Small caps are getting left behind
Poor disclosure from the likes of Cettire, Monash IVF and Johns Lyng is a reminder of the gulf between small caps and the rest. Superannuation makes it worse.
Jun 12, 2025 – 3.06pm
Differences of opinion are what makes markets work. But when it comes to the health of Australia’s public markets, three of our wiser heads are in furious agreement.
At the Australian Securities and Investments Commission’s symposium on the future of markets this week, Barrenjoey co-founder and executive chairman Guy Fowler, Future Fund chief executive Raphael Arndt and University of Melbourne professor of finance Carole Comerton-Forde were unanimous in their view that regulation wasn’t responsible for the dearth of new IPOs, the poaching of listed companies by private equity, and the takeovers of a series of blue-chip names.
That’s good news for ASIC chairman Joe Longo, who has made improving the health of public markets a priority but is also keen to avoid adding more regulation to an overregulated economy.
But after the events of the last few days, we’d make a polite suggestion to Longo and ASX chief executive Helen Lofthouse: let’s make sure we enforce the rules we’ve got.
Thursday brought yet more evidence of frustrating disclosure problems in listed companies.
Cettire shares plunged 30 per cent after a staggering profit downgrade less than 20 days from the end of the financial year. Analysts had expected the company to record EBITDA of $7.8 million in the 2025 financial year, but Cettire waited until Thursday to tell the market that EBITDA sits at $500,000 with one month to go. We’d also note a big block of stock was sold on Wednesday, with Cettire shares down 4 per cent. An unfortunate coincidence, perhaps?
Add this to a growing list of examples of poor disclosure from recent months. As my Chanticleer colleague Anthony Macdonald pointed out on Wednesday, it’s preposterous that Johns Lyng Group could confirm it’s received a takeover bid from Pacific Equity Partners without revealing the price of that bid. There are other examples too: a shock financial result at OFX that sent its share price plummeting, and Mayne Pharma’s baffling decision not to tell the market about a letter from the US Food & Drug Administration accusing the company of making false or misleading claims about the risks associated with its key drug.
Most of these disclosure stuff-ups are coming from the small end of the market, where fund managers have grown sadly used to them. But among some veteran investors, there is a sense that instances of companies holding on to bad news are becoming more prevalent for a couple of reasons.
The first goes to the dynamics reshaping the market, which have conspired to mean the smaller companies are simply receiving less attention than they once did.
Fowler told the ASIC symposium that increasing capital flows into passive investment strategies that track the main ASX benchmarks (such as the ASX 200 and ASX 300) are being compounded by large superannuation funds tracking the same benchmarks to ensure they aren’t at risk of failing the industry’s MySuper performance tests. This means there are simply fewer active managers to support smaller companies, or even listen to their stories.
“Twenty years ago, if you were doing an IPO of a $500 million company, there would be 30 fund managers who would give you $50 million bids. It’s less than a tenth of that today,” Fowler says. “Fifty per cent of the market’s superannuation money is basically index trading. And all the managers they give the money to are asked to do that … if you’re small, you’re not on the index, no one cares.”
Arndt revealed that the Future Fund started an Australian small-cap strategy that “was only available to us because super money flew from that strategy, they say, because of the benchmark test”.
Several small-cap managers told Chanticleer super fund mergers have also played a role here. As funds get bigger, their willingness to allocate funds to small-cap managers has diminished, in part because the economics just don’t make sense given their scale. The surviving active fund managers don’t necessarily want super fund money because it often comes with unattractive terms: fixed-dollar fees, very high hurdles for performance fees and harsh clawback provisions. “If you’re a good manager, you don’t want that sort of money,” one small-cap fundie told this column.
These changing dynamics have split the market into haves and have-nots: companies in the ASX benchmark indices, and those that aren’t.
The fact that Virgin Australia and retirement community developer GemLife are proposing to raise around $680 million and $750 million respectively through their ASX floats is no coincidence – that’s the level of free float a public company needs to qualify for admission to the ASX 300, and subsequently get the benefit of flows from passive investing and big super.
The result of this is that most small-cap managers are increasingly focused on trying to find companies stuck in what one fundie calls “micro-cap hell” that can get big enough to force their way into the ASX 300, either through organic growth, by acquiring businesses, or getting taken over themselves.
But this isn’t an easy task. As independent strategist Gerard Minack told the Morgan Stanley conference on Wednesday, Australia is a stagnation nation. Anaemic productivity growth, investment growth and earnings growth don’t exactly provide a backdrop for small stocks to grow their way into the relevance provided by benchmark inclusion.
Another factor that may explain recent examples of disclosure is the growing prevalence of trading on earnings momentum, which one Australian fund manager estimates could account for as much as 25 per cent of daily trading volume. This trading strategy is pretty simple: buy companies where earnings are increasing or being revised higher, and sell stocks where earnings are falling away. Boards are always much slower to disclose bad news than good, and the growing importance of earnings momentum may only entrench that.
There are other market dynamics creating a gulf between the haves and have-nots, including the gap between the way private and public companies are valued. Fowler told the ASIC event he’s had instances where private equity firms considering the float of a privately held company have demurred after feedback from fund managers suggested the business was worth less than what it had valued it. Pressure on private equity firms to increase liquidity to their investors or more regulatory intervention around unlisted asset valuations may eventually change this dynamic.
Of course, we don’t need to feel too bad for the small-cap active fund managers left standing. While the small-cap sector clearly needs to read the riot act on disclosure, the fundies in this sector are accustomed to the sort of negative surprise delivered by Cettire on Thursday, and revel in the fact that less scrutiny creates inefficiencies that can be exploited. Several of the 10 best-performing funds in the most recent Mercer survey were small-cap strategies.
“You have to be more patient and willing to accept more volatility to drive outperformance,” one leading small-cap manager says.
But what’s clear is that fewer market participants have that patience – and wise heads like Fowler and Arndt are right to wonder if that’s good for investors, and the country.
“One thing that does genuinely worry me is the short-termism and index focus of a huge pool of money in our market, whether it’s index funds, passive funds, or super acting the same way effectively,” Fowler says.
“I’m just not sure long term that is what the market is intended to do as a capital allocator.”
