• Christopher Hall

Man beats machine - Active Managers profiting from the current Micro-cap run

Micro-cap shares are running hot; +10% over the last month. The question is, who has captured the best of the run?

On the ASX there are many active managers (LICs) in this small/micro-cap space. We looked at 19 LICs and four passive funds (ETFs) to find the winners.

May 2015 to January 2018

To compare performance, we looked beyond the last month.

Anyone who knows micro-caps knows that it’s not the quick trade that makes the killing, but the right trade that brings in the 10-bagger.

May 2015 was:

  • When the wheels fell off the Australian Blue-chips

  • Around the time small and mid-caps took the reins on the ASX and shot the lights out (Domino’s, Aristocrat, Bellamy’s, Blackmores etc.)

Since Commonwealth Bank paid their May 2015 dividend we’ve been divesting the Australian Blue chips and focusing on the small to mid-cap space which is another reason why this period matters for our clients.

Who is winning?

For the Active managers, in order of top performance:

  1. Acorn Capital (ACQ) + 49%

  2. NAOS Emerging Opportunities Fund (NCC) + 42.7%

  3. WAM Research Limited (WAX) +29.1%

  4. WestOz Investment (WIC) +26.3%

If we insert indices and ETFs, then Australian’s Emerging Companies Index (XEC) is 2nd at +46.8%

Which is the best buy?

There is no ETF for Australian’s Emerging Companies Index (XEC) which takes that index out of contention.

For the top performing ETF iShares S&P/ASX Small Ordinaries ETF Index (IOS.AXW) comes in 6th at +24.6% and has the lowest fees in the Top 6 by far.

Note: there are other ETFs with similar performance to ISO which we prefer for reasons other than performance.

Comparing the LICs

  1. Acorn Capital (ACQ):

  2. Is trading around a -11% discount to NTA – arguably a bargain

  3. Has a market cap of ‘only’ $56m. Our hurdle is preferably $70m+ for liquidity and economies of scale for ASX-listing fees and other fixed costs of running an LIC

  4. Is illiquid with a relatively low turn over

  5. NAOS Emerging Opportunities Fund (NCC):

  6. Recently started trading at a premium around 7%. That amount is somewhat palatable, but expensive by definition

  7. Market cap of $87m. Over our hurdle, although only just over $70m

  8. Liquidity is still below ideal levels

  9. WAM Research Limited (WAX):

  10. Is trading at a +15% premium. Just last month WAX was at a +30% premium. Very expensive by definition

  11. A strong market cap of $286m

  12. Relatively healthy daily turnover and liquidity

  13. WestOz Investment (WIC):

  14. Is trading at a slight discount – arguably a reasonable buy

  15. A healthy market cap of $153m

  16. Is reasonably illiquid with a relatively low turnover,

Comparing the LICs, it would seem that ACQ is the best buy, although the prudent investors look a little deeper.

The full picture

ACQ does have the best performance and greatest discount.

However, WAX has been trading at a premium for three and half years – before the small/mid-caps took over from the blue-chips. Many would say this longstanding premium is the price an investor pays for quality, and with the tenure of the WAM team, that’s a fair statement.

Putting WAX’s performance into context however, WAX reached a higher performance in mid-2016, and has fallen slightly in price since then.

What’s driving the performance

It’s clear to see from the index perspective that XEC and XMD are being pushed higher by the mining companies within those indices (XSR and XMR are the indices to look at).

There is definitely an art to picking mining companies, but make no mistake, for most of the time the tailwind of world commodities prices is the dominant force in play.

WestOz’s reputation in the market place is having a strong mining slant/background/focus. Often we will look at WIC as a proxy for small cap mining companies at times when picking individual shares is hazardous.

Conversely the WAM team are known in the market place for picking industrial companies and less for mining picks. Arguably this is why WAX’s recent peak share price was 18 months ago – before current micro/small/mid cap commodities run started.

LIC’s top holdings

Each LIC holds a basket of hand-picked shares. This basket of shares can indicate where the performance has come from and how volatile it may be in future.

  • ACQ have direct mining exposure, notably Kidman Resources (KDR) +2,500% since May 2015;

  • NCC run a concentrated portfolio and with the majority providing significant returns in the last few months;

  • WAA show exposure to mining services (industrials) rather than direct mining companies

  • WIC show strong exposure to the gas companies that have dominated the ASX’s performance over the last quarter

Looking at the best performing shares in each portfolio it would appear that WAA have a spread across larger, less volatile companies. This again is another reason investors will pay such a high premium for the WAX shares which are often considered a ‘Core LIC’.

With the mining and gas expertise, WIC tend to be more of a ‘Satellite LIC’ or ‘Trading LIC’, used to tilt portfolios into a mining/gas thematic.


ISO has performed exceptionally well.

ACQ and NCC are the top performance, although are considered higher risk

WAX is a core LIC for many portfolios.

WIC is an ideal Mining/Gas LIC when tilting a portfolio for that exposure.