SMSF members looking to include allocations to small caps need to use a specialist fund manager to do so if they want to achieve the best results, according to an investment expert.
Glennon Captial founder Michael Glennon said the small-cap sector could present SMSFs with great capital growth opportunities that could be used to complement income generated from large-cap holdings.
The small-cap sector Glennon is referring to includes stocks not part of the Australian Securities Exchange top 100 and presents capital gain opportunities due to information inefficiencies. However, he emphasised specialist managers, and not self-directed investors, were best placed to take advantage of those circumstances.
“Small-cap managers are out there seeing a lot of companies every year and if you do this, you’ve got a distinct advantage over someone who is not in contact with those organisations,” he said.
“For example, I’m out there every day talking to the management of companies, meeting people involved with new companies and using my experience to understand the businesses that have done well and those that haven’t.
“If someone is out there trying to conduct this process part-time, reading a couple of announcements in their spare time, they’re automatically lagging behind.”
He added specialist managers also had the advantage of being able to read company balance sheets and recognise when an organisation might need capital.
Furthermore, they would receive correspondence from small-cap companies about capital-raising activities self-directed investors missed out on, he said.
He said specialist managers had the ability to construct a diversified holding of small-cap equities – an imperative element for a successful allocation to the sector.
“If the small-cap component of a portfolio is not constructed the right way, that is, an investor has one or two small-cap equities in a portfolio of 30 or 40 stocks, the risk is much greater because one of the two selected stocks will have to do well,” he explained.
“Whereas we don’t get them all right in our portfolio, but because we’ve got 30 or 40 stocks, coupled with the way we construct the portfolio, it makes the associated risk a lot lower.”
